Under the rhythm of the Argentine tango: the echo of the currency crisis

During the 2000s Argentina was a clear example of a developing country. A number of factors promoted such conclusion at once: provided by rich natural resources, with the educated population and democratic institutions, however, this South American state manages periodically to finish the economy before a default. What is happening in Argentina today? Moreover, is her example important for other developing countries, including Russia?

Since early 2018, the Argentine peso has depreciated by more than 50%. During these months, as many Latin American financial analysts emphasize, the State Central Bank spent over $ 10 billion, about 15% of its gold and currency reserves, on supporting the national currency exchange rate. In addition, on August 30, the Argentine Central Bank raised its key interest rate immediately by 15% – to a record level of 60%. The decision was due to a sharp collapse of the national currency peso to the US dollar – the largest since 2015, when a floating rate was introduced. For the first time in many years, the developing country of Latin America had to turn to the IMF for help. Last summer, despite his promises to Vladimir Putin, Argentine President Mauricio Macri had to cancel his planned trip to the World Cup and stay in Buenos Aires in order to conduct complicated negotiations with the IMF on the allocation of a loan of $ 50 billion.

It is worth noting that during the 200-year history of Argentina, the currency crisis has already happened eight times. According to leading Argentine economists, the current problems can be considered an “echo” of the unfinished exit from the 2001 crisis. Then, after the announcement of the default of $ 100 billion, creditors for 15 years pursued Argentina through litigation in international instances. Only by 2016, Argentina was finally able to come to an agreement with investors and return to the international debt market.

Recent developments in Argentina have once again become a source of “food” for thought in many developing countries. In the classical economic theory, the existence of stable democratic institutions is considered a guarantee of successful long-term development of the state. However, in Latin American conditions this feature has been repeatedly refuted. It is worth returning to Argentina. At first glance, the state, unlike its South American neighbors, boasts an exemplary democracy. According to the state constitution, the president, governors and deputies of the parliament are elected by popular vote. In turn, the head of the state cannot hold office for more than two 4-year terms. As “Argentine practice” shows, every two years there are important will expressions, because of what each time politicians are forced to postpone painful reforms.

In 2015, the current president, Mauricio Macri, won the election in an intense competition with two rivals. In the lower house of parliament, his party “Republican Proposal (PRO)” was forced to form a governing coalition with two parties, taking together 109 out of 257 seats, but she did not manage to form a majority. Such a balance of forces forced to seek compromises in the implementation of meaningful bills.

At the beginning of his presidential term, Mauricio Macri managed to carry out reforms that did not require special sacrifices: he immediately abolished currency restrictions, completed a long-term judicial war with international creditors, trying to meet their high demands for Argentina. Nevertheless, to increase the efficiency of public spending has remained an unattainable goal: during the years of the Macri presidency, the budget deficit and the current account deficit doubled. If before the current president, the source of funding for Argentina’s expenditures was issuance and domestic borrowing, then under Mauricio Macri the state made record loans to make loans on the eurobond market. It is worth turning to the indicators: under the previous president Cristina Kirchner, the national debt in relation to the GDP fluctuated at 35-40%, and in 2018 it will exceed 60%, and most of it is nominated in foreign currency. The borrowings have not been able to stimulate the Argentine economy: the GDP does not show positive dynamics and every second year from 2011 the country suffers from a recession.

Many well-known “minds” of Argentina’s financial market had been optimistic for the coming to power of Mauricio Macri and assumed that after the successful restoration of the Brazilian Eurobond market, Argentina would become the next investment idea. However, as representatives of the largest Argentine companies say, trade unions are also a big problem of the Argentine economy. Despite the constant devaluation of the peso in recent years, the cost of labor has steadily increased due to the annual indexation of salaries. With the advent of Macri, the management of many national “giants” gained the hope that indexation will occur only based on the results of the negotiation process, and not be established by an ultimatum requirement. However, a number of energy companies, which the previous government of Christina Kirchner nationalized in 2012, continued to reduce the extraction of natural resources, while increasing the debts in a geometric progression.

Despite attempts to use new economic instruments to “improve” the Argentine economy, bonds have become one of the most popular investment ideas. Over the next two years, Argentinean issuers have borrowed more than $ 40 billion on the international market, according to the “JP Morgan emerging markets” index, which many foreign investors are targeting. By the end of 2017, Argentina rose to the fourth line, taking more weight than Brazil and Russia. Perhaps investors would be willing to continue lending, however, in January 2018, the government of this South American state issued a record series of Eurobonds for $ 9 billion, but due to the tightening of the monetary policy of the US Federal Reserve, in the end it affected the fact that the capital began to return home.

This week, Macri promised to cut Argentina’s budget deficit, reduce poverty and curb inflation. However, the Argentine president spoke out negatively and noted that exporters “have more opportunities to participate”. In addition, the leader of Argentina said that almost half to cut government spending would also reduce the number of ministries. At least five ministries will be included in other departments.

To date, as many experts of the world economy have noted, Argentina, together with Turkey, have been in a deplorable situation due to the largest deficit in the current account. In turn, in Argentina, it exceeded the threshold of 5%, which would mean the need for an annual investment of about $ 30 billion in conditions where it is required, on the contrary, to demonstrate the ability to return previously raised funds. According to analysts, the allocation of the IMF loan to Argentina for $ 50 billion is unlikely to solve the problem. Moreover, if the opposition decides to slow down and block bills that cut government spending, then even the Argentines will not even see this money. Most likely, at the end of this autumn, developing countries will wait for a new round of the debt crisis.