Argentina's Economic Crisis
For weeks, international investors of the emerging markets Turkey, South Africa, and Argentina have been hastily pulling their money outside the countries’ borders. The strengthening U.S. Dollar, in addition to the rapid inflation in these three countries, have left Argentina’s citizens wondering how they will pay their foreign currency debt, afford imported goods, and prevent capital flight. With escalating political tensions, a high unemployment rate, and struggling citizens, Argentina is being haunted by its memories from the 2001 economic meltdown. Being one of the most penalized emerging markets in 2018, it is now undergoing the biggest-ever International Monetary Fund bailout.
It began when President Macri’s predecessor, Cristina Kirchner, appointed President in 2007, implemented free-spending and protectionist economic policies that set the stage for the beleaguered nation. According to the Japan News, “Macri, a pro-business conservative who took office in 2015, promised to trim Argentina’s fiscal deficit, reduce poverty and curb inflation, but has struggled under the weight of the country’s economic problems.”
Upon being elected President, Macri took on a gradual approach for economic reform. However, in recent years, Macri was too slow in harmonizing the fiscal deficit. With pressure on the central bank, the government turned to printing money prior to the 2017 midterm elections.
The monetary base enlarged over 30 percent since last year, one of the highest in the world, due to capital flight and investors selling their risky Argentine assets (such as market currencies or stocks). With all of these consequences having a negative impact on the exchange rates, Argentines are now bracing for a recession. Alberto Ramos, Head of Latin American Economics at Goldman Sachs, expects the economy to contract more than 2 percent this year and inflation to pass 40 percent.
In an effort to put a break on the inflation, Argentina’s Central Bank’s hiked interest rates to 60 percent - the world’s highest - along with implementing an increased reserve requirement.
In addition to the fiscal deficit, the country’s rising trade deficit must also be financed by foreign borrowing or investment, which is difficult at a time of high U.S. interest rates pulling international investors to the U.S.
In June, Argentina received a $50bn standby loan from the International Monetary Fund. The conditions of the aid were that the Central Bank of Argentina must decrease its stock of Lebacs - short-term, high yield domestic debts - to prevent unleashing more pesos into circulation, begin issuing new debt, and cut spending.
Although the IMF expects the nation’s economy to stabilize by the end of 2018 and begin a gradual recovery in 2019, the peso still continued to spiral downward.
According to Aldo Abram, Director of Libertad y Progreso in Buenos Aires, despite President Macri’s reduction of electricity, water, gas, and transportation subsidies, the fiscal deficit will be about 5.5 percent this year, and 3.5 percent in 2019. Additionally, the government has suggested closing about 10 government ministries and increasing taxes on some exports in an effort to stabilize the peso.
Trade is the biggest way that global markets will take a hit. Global businesses that export an abundant amount of goods to the country are concerned about imports becoming more expensive for Argentine consumers. Rising oil prices have also pushed transportation costs higher, affecting the prices of goods transported by trucks for both Argentines and foreigners. Aside from that, J.P. Morgan economists wrote that "the forecast continues to assume that the spillover from these countries to the rest of the emerging markets will be fairly limited."