Confidence in the Argentine economy is evaporating as the government grapples with internal political struggles, a growing pile of domestic debt and inflation approaching 90%.
The US dollar has soared to new highs on the black market as Argentines, limited to buying $200 a month, run to scalpers to get rid of their rapidly devaluing pesos. On Friday (22), the dollar was sold on the streets of Buenos Aires for 337 pesos, an increase of 15% in just one week.
Rapidly deteriorating public sentiment and the government’s growing difficulty in financing itself are raising fears of a widespread economic crisis similar to those that have periodically plagued the grain-exporting country over the past half century.
“The risk of an acceleration in the pace of deterioration of the Argentine economy is significant,” warned Citi this month.
The gap between the dollar on the black market and the artificially controlled official rate has widened to more than 150% — a level last seen during the country’s hyperinflation in 1989-1990, according to brokerage Portfolio Personal Inversiones.
Argentina has been largely excluded from international debt markets since its default in 2020. Instead, the government finances itself through currency issuance and domestic debt, most of which is linked to inflation and with ever-higher interest rates.
President Alberto Fernández dismissed the prospect of a one-off devaluation. However, many Argentines and bank economists fear the economy will get much worse before it gets better.
“The dollar sales are crazier than ever,” Adán, 28, who exchanges money illegally in downtown Buenos Aires and declined to give his full name, told the Financial Times. “The only thing customers don’t want is weights… many ask questions about what’s going to happen now.”
The sudden resignation of Economy Minister Martín Guzmán on July 2 followed months of infighting in the ruling Peronist coalition. This raised concern about the ability of Fernández’s weak and unpopular government to deal with the rapidly deteriorating situation.
“I decided to make a big purchase that I was putting off because I knew the markets would go crazy when the minister resigned,” Paige Nichols, a 35-year-old marketing consultant, said while shopping in Buenos Aires.
Guzmán left just three months after negotiating a $44 billion debt restructuring deal with the IMF. But his promises to curb the budget deficit were fiercely contested by powerful vice president Cristina Fernández de Kirchner and her radical allies. Kirchner believes Peronists should spend more to protect voters from rising inflation ahead of the 2023 presidential race.
Despite Guzman’s early departure, IMF officials believe the economic goals the fund agreed with Argentina could still be met by his successor, Silvina Batakis, if she acts quickly.
Kristalina Georgieva, managing director of the IMF, said that Batakis understood “the purpose of fiscal discipline” and described a “very good” first connection with the minister.
But events are in danger of overtaking Batakis, a little-known figure who few believe had the political clout to effect the cuts in energy subsidies and reductions in money printing that his predecessor failed to achieve. “No measure will be effective until it is clear that Vice President Cristina and her group will not sabotage Batakis,” political risk group Eurasia said in a statement.
Inflation, meanwhile, reached 64% a year in June and is expected to accelerate beyond 90% by the end of the year, according to Morgan Stanley.
Despite high world commodity prices, Argentina’s net foreign currency reserves hover around just $2.4 billion. Expensive energy imports are partly to blame, but the country’s grain exporters are also hoarding their harvest because they fear an imminent devaluation, rather than boarding and getting paid in pesos at the unfavorable official rate.
Argentina’s sovereign debt to private creditors, which was only restructured in 2020, is trading in risky territory. And the country is expected to enter a brief recession this year, with contractions in the second and third quarters, according to a central bank survey.
Ignacio Labaqui, a senior analyst at Medley Global Advisors in Buenos Aires, said economic factors are only part of the problem. “Although the government has announced a coherent economic plan, Fernández has no credibility,” he said. The ruling coalition failed to reassure the public, “it’s a question of when they devalue, not a question of if”.
Two pillars of the IMF deal are to reduce the fiscal deficit within three years and to curb the issuing of money by the central bank to finance it. Buenos Aires agreed to these belt-tightening conditions in exchange for a four-and-a-half-year grace period on payments to the IMF, with full repayment through 2034.
Argentina is limited to printing 765 billion pesos ($5.8 billion) throughout the year to finance its deficit. But the central bank has already printed 630 billion pesos this year, more than half of them in the last month and a half.
In a bid to encourage investors to buy Treasury bills, the central bank last week promised that if prices fell, the bank would protect investments. Analysts said this could lead to the institution printing even more pesos to back the new guarantee.
It is estimated that 900 billion pesos (US$6.8 billion) of debt in local currency will mature in September alone. Confidence in the government’s ability to roll over that loan is waning amid concerns about its ability to repay and a possible imminent devaluation, despite official denials.
Reducing the pre-interest fiscal deficit from 3% of GDP last year to 2.5% in 2022, as outlined in the IMF agreement, also seems difficult to deliver. Energy subsidies, one of the main reasons for the red numbers, nearly doubled in the 12 months to June, according to Julian Rojo, an analyst at General Mosconi, a local think tank.
On top of the deteriorating economy is turbulent politics ahead of next year’s elections, which the Peronists are likely to lose. “The risk of a government collapse is not negligible in Argentina, given the current economic crisis. The government’s ability to complete the current presidential term is a concern,” Labaqui said.
Translated by Luiz Roberto M. Gonçalves
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