Argentina - New finance minister, same crisis
Even without politics, Argentina's economic crisis would be incredibly difficult to manage. The political crisis within the ruling party means the new finance minister is going fail.
Argentina is in the process of having an Argentina-style economic crisis. That is on top of the regional and global economic challenges driven by high inflation and a likely coming recession in the US and Europe.
Inflation will be around 70% this year, the country is likely to enter recession, poverty is around 40%, the currency is devaluing, and citizens are preparing for worse to come by pulling money from banks and searching for other stores of value. Argentines are losing their patience, even the ones who support the government. That a country blessed with agriculture and energy resources will have yet another economic crisis while the world is paying some of the highest prices ever for agriculture and energy resources does not encourage sympathy among the Peronist base.
Argentina’s Minister of Economy Martín Guzmán resigned over the weekend. Caught between the various political factions in the ruling party, Guzmán published a seven page resignation letter that suggested that the lack of agreement among the Peronists was holding back the country. Guzmán was clearly referencing the ongoing influence of Vice President Kirchner over the economic policies of the country and her undermining of efforts to stabilize the debt situation.
Taking over as minister will be Silvina Batakis. There are currently two competing takes on the new minister:
Batakis is a career technocrat who is about as good of a choice as can be hoped for by the Fernández administration. She is doomed to fail.
Batakis is a pro-Kirchner ideologue who is a terrible choice. She is doomed to fail.
I probably agree with the first take, but as you can see, there isn’t that much difference in the outcome. The economic problems alone are almost certainly too far gone for a simple fix that doesn’t lead to a devaluation and recession. Fixing the economic problems while successfully navigating the politics of the ruling party (not to mention the opposition and their leverage in Congress) requires a miracle worker.
Bloomberg wrote a prescient article last week on the coming peso devaluation. When I wrote the newsletter on managing the day-to-day of Argentina’s peso just three months ago, the unofficial exchange rate was around 190 pesos to one US dollar. As of this morning, it’s closer to 260 pesos to the dollar. It’s possible that the small stack of Argentine pesos I accidentally brought back with me in April will be worth about half of its original value by the time I return (hopefully in December).
One question over the recent events is their impact on the IMF negotiations. Nobody credibly thinks Argentina is going to hit its IMF targets. In spite of concerns that Batakis is too close to Kirchner, she is already making plenty of comments that appear in line with the IMF requests to stabilize the economy. So the mirage of negotiations will continue, and it’s really a matter of whether the IMF continues to accept the false promises made by Argentina’s government.
My answer remains the same that it was last December. The $40+ billion that Argentina owes is a bigger threat to the IMF than it is to Argentina’s political leaders who are quite experienced in defaulting. Therefore, the IMF continues to negotiate with itself over how to manage its own risks. It’s quite possible the IMF is willing to continue to support Argentina because Argentina’s economy is about to fall and they don’t want to be the ones to push it over the edge and take the blame yet again. In addition, the financial community is hopeful that a future administration that takes office after next year’s elections will be more market-friendly and more honest negotiators.
Argentina has operated on boom-bust cycles for over a century. Businesses operating there should be prepared for the worst. They should also be mindful that there is a likely boom at some point in the years ahead once the bottom is hit.
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