The success of foreign debt renegotiation evaporated so fast that the government could barely bask in its glory. It is not a secret that markets, just like politics, are a business that deals in future expectations more than in the pleasant contemplation of past achievements. So the central problem of the government right now is what it is projecting looking forward.
Nothing beyond the short term
The reasons that are feeding the current wave of mistrust have a lot to do with politics, management and the path the government is taking. The exchange rate and the demand for foreign currency act like a thermometer for Argentina’s expectations, and the results are not looking promising. The exchange rate is not the problem in itself: it’s just an instrument that measures the health of the economy. So the Central Bank’s measures to try to suppress the rapid decline of the peso will not last beyond the very short term.
The problem lies elsewhere: Argentina is offering no map, no clear route forward. Even the words “economic plan” are taboo, apparently. In any case, it’s clear that the country cannot hold things taped together for much longer with the current day-to-day approach. Deficits, recession, inflation and dropping purchasing power are combining to reach historic heights. The inheritances from past governments weight just as much as the present, but that’s just another very interesting discussion that doesn’t presently solve very much.
Divisions in the cabinet
The economic cabinet is currently divided, with Martín Guzmán offering a more orthodox approach and another group, led by Cecilia Todesca, which had the upper hand in deciding the last series of economic measures. This latter group includes AFIP tax bureau chief Mercedes Marcó Del Pont, Production Minister Matías Kulfas and Central Bank chief Miguel Pesce. They have some social ties in common as well as a similar view of the economy, and are the closest to President Alberto Fernández. They were already a part of the government during the late years of Cristina Kirchner’s presidency, where they didn’t have a lot of success. But they were only in the periphery of that government, while now they are at the center of decision making.
As always, the question in Argentina is: what happens next? Is this group going to change its approach? What will be needed for them to make corrections? The economy can enter into a chronic downwards spiral even without new disruptions in the short or medium term. For now, the only obvious goal of the government’s economic plan is its attempt to keep things as they are for as long as possible.
The disruption that can force a change in plans could be a jump in the official exchange rate (which the government is trying to avoid at all costs) or the final loss of what’s left of the Central Bank’s foreign currency reserves. Strictly speaking, those two scenarios are basically two sides of the same coin. And until that crisis comes, there will be no changes. Ongoing chronic problems will not force serious economic change. Fernández is surrounded the economic team he picked, made up of those who were his closest advisers since before being selected by Cristina Kirchner for the presidency.
But if the economy doesn’t force a change, there’s still the possibility that it is politics that does it. There’s one disruptive force that can be even bigger than the Central Bank losing its battles against devaluation and capital flight: a drop in the polls. If Buenos Aires Province becomes unstable due to the continued loss in purchasing power suffered by pensioners, formal, and informal workers, then changes will start to happen, because the province is the decisive district in all of Argentina’s mid-term elections.
The campaign for the 2021 mid-terms is already under way, but it usually only really starts picking up the pace in March, after the summer holidays. If the current dynamic doesn’t start showing signs of transformation by that point, the oncoming elections will start piling on pressure on Alberto Fernández’s cabinet to force the first major changes. And we know that the ultimate decision-maker in the province is Cristina Kirchner, as well as the influence she wields in Fernández’s central government.
Given this political context: Will grain exporters sell their produce, as the Central Bank urgently needs, or store it waiting for the inevitable devaluation? Will companies be able to raise money? Will they be interested in investing? Can the government win an election if none of this happens?
The 2021 clock is ticking
The timing of the crisis makes the scenario even more complicated. A quick review of Kirchnerite history shows that election years are a time in which the peso-to-the-dollar exchange rate is frozen by the government in an attempt to stave of the loss of purchasing power and win at the voting booth. This empirical observation makes the prospects of Martín Guzmán’s “exchange rate convergence” (allowing a quicker devaluation of the official rate in order to close its gap with the black market and stop the Central Bank loss of reserves) harder to believe. In Argentina, exchange rate unifications usually end up happening differently, with rapid jumps and painful social consequences. And for Guzmán, the window of opportunity to devaluate the official peso-dollar rate without paying for it with a strong drain of votes a year from now is very small. But the chances of the current economic order lasting until the election aren’t very high either.
Add to this very precarious situation the need to start negotiations with the IMF, which has so far been ambivalent towards the government, with Managing Director Kristalina Georgieva displaying an empathetic rhetoric while the Fund’s staff is much more demanding and unforgiving, as is usually the case. If the demands end up looking like the case of Ecuador, then fiscal austerity and economic reforms will also be on the table. All this, too, right in the middle of an election year. Nobody said Fernández would have it easy.
(Spanish version originally published in La Política Online)