Listen to the podcast:
Argentina’s economic crisis has reached a tipping point with all indications that the reforms begun by President Mauricio Macri are failing, kicking the can down the road to a new government that will be formed after a general election set for October 27. Macri’s bid for a second presidential term was imperiled in primaries on August 11, when he ended up 16 points behind the ticket of left-wing Opposition leader Alberto Fernandez with Cristina Kirchner as his running mate for vice president. The primaries are generally seen as an indication of the outcome in October. Investors panicked, fearing a return to the populist policies of the previous regime of Kirchner. They triggered a free fall in stocks and bonds, and rush for dollars, weakening the Argentine peso by about 20% since then.
Macri responded last week by imposing new restrictions on foreign currency purchases in a bid to stabilize the financial markets. In mid-August, rating agencies Standard & Poor’s and Fitch had downgraded Argentina’s sovereign debt, and raised fears of a sovereign debt default after the Macri administration failed to roll over $100 billion in short-term debt with the private sector.
Repeated Rescues and Bailouts
Argentina has come to “the verge of collapse” every few years or at least every decade, said William Burke-White, law professor and director of the Perry World House at the University of Pennsylvania. Each time, “the Argentine people have looked to Peronist governments as a kind of rescue and bailout,” he noted. Peronism is the term used for the political ideology called “justicialism” that was propounded by Juan Peron, who was Argentina’s president for three terms between 1946 and 1974, and that of the Justicialist Party he founded in 1947. Justicialism rejects communism and capitalism, and stresses social justice, economic independence and political sovereignty; it is generally seen as worker-friendly.
However, the policies successive of Peronist governments have landed the country in trouble, according to Burke-White. “What we’ve seen in Peronist governments is an increase in social spending and policies that improve people’s daily lives, usually at the expense of the Argentine economy over the long term,” he said. Argentina’s late president Nestor Kirchner, who served between 2003 and 2007, and his wife Cristina Fernández de Kirchner, who succeeded him and was president until 2015, followed that policy, which many have seen as left-wing populism.
“It’s not surprising that as the economy starts to spiral downward, people are looking in the next round of balloting in October to the Peronist partnership between Fernandez and Kirchner to rescue them once again,” Burke-White noted.
“Foreign investment never really made it to Argentina in any significant way.” –Manuel Balan
According to Manuel Balan, professor of political science and international development at McGill University in Montreal, it is premature to determine whether the Peronism that Argentinians now seek is “a good idea or a bad idea.” He noted that Peronism is neither a leftist nor a right-wing movement, and that it has “a populist feel to it, even though not all Peronists are populists.” Even so, he agreed with Burke-White that “people are turning towards Peronism in a moment in which the economy has gone south over the last few years under the Macri administration.”
Burke-White and Balan explored the outlook for Argentina’s economy on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)
Argentina’s GDP of about $500 billion contracted 2.5% in 2018 and is expected to shrink a further 1.3% this year, according to a World Bank report. Inflation has ranged between 48% and 57% this year. The peso had plunged nearly 24% against the dollar since Macri’s loss in the primaries; it recovered some ground after last week’s announcement of capital controls.
Macri rode to power in 2015 after promising to revive the economy following an initial austerity hump he hoped Argentines would absorb. He held out hopes of replacing the alleged corruption and free-spending populist policies that marked the Cristina Kirchner administration, which are blamed for Argentina’s economic woes. Last year, he also persuaded the International Monetary Fund to provide Argentina $57 billion in a bailout, even as Argentinians have blamed the IMF for its economic crisis in 2001; the IMF has since acknowledged its failed role at that time.
Why Macri’s Rescue Plan Failed
Macri’s plan could have been successful if Argentinians were prepared to make some short-term sacrifices. However, the country was facing shortcomings elsewhere in the economy in addition to a debilitating drought last year. Marci’s plan was to cut spending, which would entail a period of adjustment with increased poverty and unemployment. The economy would then be in better shape to attract international investors. “There was going to be a rain of external investment in the country that would help the economy grow,” said Balan. Expectations were for those gains to “trickle down to people eventually and solve what were going to be short-term economic issues that these adjustment policies would generate,” he added. “This cycle was never actually realized.” The Macri government was able to convince the International Monetary Fund to grant a $57-billion loan deal, “but foreign investment never really made it to Argentina in any significant way,” he said.
Burke-White agreed, and said that the initial plans of the Macri government “made good sense” in that they were about stabilizing the economy, cutting spending and attracting investment. They worked out “relatively well” in the early stages, but they also called for sacrifices, he noted. “Those stages are painful. Those involve budget cuts. Those involve paying back bondholders in a way that’s necessary to re-engage the global economy, but they put strains on the domestic population.”
As luck would have it, a drought in 2018 hurt the economy, even as the Macri government was dealing with a fiscal crisis, Burke-White noted. “[Those problems] hit at exactly the wrong time so that the broader plan could never be realized, and Macri found himself in a very difficult position earlier this year.” Burke-White has served as an expert witness in litigations involving international investment disputes for Argentina, among other countries.
According to Burke-White, Macri’s poor showing in the latest primaries reveals that he has “alienated really both sides of the Argentine political debate.” A key factor in that was his about-face on capital controls. “Macri had long been in favor of removing the capital controls that were in place under President Kirchner before him with the goal of allowing people to save in dollars and allowing businesses to operate and to exchange currencies freely,” he said. “And then he had to reverse course. [He had to] take a big IMF loan and put in place the same currency controls that he had been advocating against for a long time because the economy was in such dire straits.”
The new capital controls limit purchases or bank transfers of foreign currency by Argentinians to $10,000 a month, and those by nonresidents to $1,000 a month while disallowing bank transfers abroad. Corporations would need prior authorization before purchasing foreign currency, and exporters are required to repatriate all foreign hard currency earnings, The Wall Street Journal reported.
Macri had no choice other than to reimpose capital controls, according to Burke-White. “There’s not enough money in the Argentine banks to continue to prop up the peso and to meet external demands for dollars,” he said. “Every time Argentina goes into one of these downward economic spirals, it tends to impose some version of what in Argentine parlance is called a Corralito — restrictions on removing U.S. dollars from the country to protect its bank accounts, and preventing people from changing their pesos into dollars.”
“Argentina has to confront this dual reality of a population that expects to be wealthy and part of the world and an infrastructure, and an economy that looks very different.” –William Burke-White
Argentines encountered Corralito for the first time in December 2001, when the government almost completely froze bank accounts and dollar withdrawals to prevent a run on banks, initially for three months, but it was officially withdrawn only a year later. Although the latest capital controls are a milder version of what was in place under Kirchner four years ago, “they’ve come back and hit [Macri’s] political base because part of his promise was this liberalization,” said Burke-White.
The capital controls have a wider impact than one might imagine. “Argentines are smart and have saved money in dollars over the years because inflation always ends up spiking again at some point,” said Burke-White. “So, this hits both the small Argentine investor or just an Argentine family trying to save money, as well as the business sector that needs to be able to move capital in and out of the country to function. Macri’s early administration was built on removing those capital controls because investors want to be able to expropriate their capital and individuals want to be able to save in dollars.”
According to Balan, it was unrealistic of the Macri government to expect foreign investors to come rushing in. Weak infrastructure gets in the way, “and foreign investment rarely will help solve those issues,” he said. He pointed, for instance, to Argentina’s oil sector, which has vast reserves that have not yet been exploited. “They require investment in order to do so. [However], that external investment is not going to provide that infrastructure of roads, of trains, of different things in order to actually get that oil out in an efficient and effective way.” In one particular case of the Vaca Muerta oil field, foreign investment did come in, “but then everything around it [such as] the roads were so messed up that they couldn’t really take advantage of that,” he added.
The Trump administration’s announcement last week of a $400 million investment to finance roadway projects in Argentina “is a drop in the bucket,” said Balan, adding that the country’s infrastructure problems would need more than one government term to be solved. “This is not a four-year thing. It is something where investment needs to come for a long period of time, and in a steady way — there needs to be a long-term project,” he explained. “And the words ‘long-term project’ in Argentinian politics are almost oxymoronic.”
Burke-White traced the “false hope of foreign investment” to a deeper aspect of how Argentines’ perception of their country conflicts with ground realities. On the one hand, Argentina “has an awful lot going for it,” he said, citing its “incredibly well educated and engaged population,” a robust agricultural sector, and energy resources. “Historically, it has been among the richest countries in the world at times,” he continued. “So, it has a population that expects to be in in the G-20 and part of the global economy in a big way and to reap the benefits of that, but it also continues to miss out on long-term infrastructure development, and on the stability of an economic system that is necessary for [such] investment to flow and flourish. That tension makes it politically even harder [to address] than in typical developing countries. Argentina has to confront this dual reality of a population that expects to be wealthy and part of the world and an infrastructure, and an economy that looks very different.”
“The words ‘long-term project’ in Argentinian politics are almost oxymoronic.” –Manuel Balan
The Re-emergence of Cristina Kirchner
One twist in the emerging political landscape is the re-emergence of Cristina Kirchner as Fernandez’s vice-presidential running mate. While she was expected to be the main challenger to Macri, she made a surprise announcement in May that she would join Fernandez as his running mate. “Cristina realized that she was a very polarizing figure, loved by some, despised by others,” said Burke-White. “Coming in as vice-president avoids some of the anti-Cristina movement that would be there if she were running for president.” She has also been able to overcome 11 indictments on charges of corruption, he noted.
Both Burke-White and Balan said Fernandez will not be a puppet to Cristina Kirchner. “But the relationship there is complicated,” said Burke-White. “It leads to even greater instability in the markets because no one quite knows whether they’re going to get a Kirchner presidency Take 3 or if Fernandez really represents something new, which is what he is claiming as we move toward the final balloting.”
Short-term and Long-term Challenges
Burke-White put the challenges facing Argentina’s economy in two buckets: short-term and long-term. In the short run, one problem is the political uncertainty in the run-up to the October election, which he hoped would go away if Fernandez wins. The other short-term problem is a fiscal crisis the Macri government faces. “It doesn’t have money in the bank accounts, and that is going to get exacerbated to some degree when Fernandez comes to power, because he will be expected to placate some of his political support, particularly from the Kirchner side of the ticket that’s going to expect an increase in government spending,” he said.
The longer-term challenge is to restore the Argentine economy and to get it moving forward, said Burke-White. “That needs political stability and political economic discipline over time. Fernandez has to figure out a political way to achieve the goals that Macri set forward four years ago, but in a much softer and more populist version. The question is: Is he willing to do that? Is that where he wants to take the country? And is he politically able to do it?”
“Can [Fernandez] invent slightly different economic policies that aren’t going straight back to Kirchnerism and that also aren’t the austerity that Macri represents?” –William Burke-White
According to Balan, while Fernandez will face challenges both on the political front and to his economic policies, “he is uniquely positioned to navigate [them].” Fernandez was a key political figure in the Nestor Kirchner administration (2003-2007), which was successful on many levels, he noted. “[Fernandez] has the Peronist credibility. He has so far the support of Kirchnerism,” he said. At the same time, Fernandez positioned himself against Cristina Kirchner and Macri when he disagreed with their policies, he added.
Fernandez is “a more moderate, centrist version of the Kirschner dynasty, in a sense,” said Burke-White. He noted that if Fernandez were to win, he would face pressures to increase subsidies and government spending. Balan expected a Fernandez government to impose “further controls on the dollar,” continuing on the same path as the Macri government on that front. Fernandez, it appears, wants to retain the peso’s value at a competitive level that would meet his goal of stimulating both industrial production and agricultural output, he added.
“But the question is, can he invent slightly different economic policies that aren’t going straight back to Kirchnerism and that also aren’t the austerity that Macri represents?” Burke-White wondered. “We don’t know whether he has the political wherewithal or if there is an economic path that sort of marries those two agendas.”