[Mac Margolis] Argentina’s Macri scores economic own goal

By Bloomberg
  • Published : Sept 5, 2018 - 17:10
  • Updated : Sept 5, 2018 - 17:10

From debt vultures and cooked books to fiscal time bombs, Argentine President Mauricio Macri inherited quite the mess. In his three years of office, he has handled most of these challenges remarkably well, drawing cheers from investors and his compatriots. Here was a decisive, business-friendly manager, talking transparency and free market initiatives to end what might have been “the largest populist experiment” in the world, in the words of Oxford Economics analyst Guillermo Tolosa.

Now the much awaited Argentine return looks imperiled. Last week, with the battered peso swooning again, the public deficit agape and discontent sizzling on the streets, Macri seemed more desperate than decisive. In an unscheduled appearance Wednesday, he took to YouTube to air a plan to take a large advance on the country’s $50 billion loan with the International Monetary Fund, already the fund’s largest bailout on record.

The brief announcement, in Spanish, apparently was crafted to quell jitters at home over the parlous state of the nation’s economy and the markets’ “mistrust” over Argentina’s capacity to honor its debts. What happened was just the opposite.

The peso fell another 20 percent. To stanch the losses, the government on Thursday boldly hiked its benchmark interest rate to a whopping 60 percent -- to no avail. By late Thursday the Argentine peso was this year’s worst performing currency, outstripping Turkey’s beleaguered lira.

Bad communications didn’t help. Why Macri made the statement instead of government economists -- who might have unpacked the financial complexities and so spared the nation’s leader public puzzlement -- was a mystery. So was the decision to announce the request ahead of the IMF, which apparently was caught off guard.

Argentina is not Turkey. Macri has honored his pledge to open the market and restore Argentina to the graces of the financial community. He has diligently followed the IMF’s script. And no one should second-guess his government’s spadework in disinterring the economic skeletons from the spendthrift decade under Cristina Fernandez de Kirchner. Consider that while only around 8 million Argentines paid taxes, some 21 million were drawing cash transfers and subsidies, according to Oxford Economics.

No doubt, part of the country’s woes owes to wider events, such as contagion from the Turkish economic rout and Argentina’s worst drought in three decades. But Argentina also is the victim of what Interior Minister Rogelio Frigerio called “unforced errors.”

“This is a very difficult country to govern,” Frigerio told business leaders and policymakers in Buenos Aires last week. Yet bad bets, missed cues and fiscal foot-dragging have made Argentina’s plight measurably worse and put Macri’s celebrated managerial nous to the test. Despite repeated enjoinders from financial analysts, Macri pruned instead of slashing public spending. The modest savings were offset by aggressive borrowing, bloating the total public sector deficit to a perilous 9.3 percent of gross domestic product, Oxford Economics wrote in a client note in April.

Such go-go policies might have made sense when the international financial markets were flush. “Why stop borrowing if the world is willing to finance your deficit?” Tolosa said. But emerging markets also sink, and with the US Federal Reserve’s rate hikes and contagion spreading from the tanking Turkish economy, the fiesta is over.

“It’s important to say that the Macri administration didn’t create the problem. This is the cost of the populist experiment he inherited,” said Alberto Ramos of Goldman Sachs. “But the price of fiscal gradualism is that you depend on the kindness of strangers. Market sentiments change and that leaves you vulnerable, and then your only option is to adjust under duress.”

Just how severe the duress will be is a key question. Argentina is almost certainly headed for recession this year, and perhaps a mere 1.5 percent growth in 2019. That’s practically a guarantee of harsher austerity just as Argentines prepare to cast ballots for a new president in October 2019.

“The election is likely to turn into a referendum on Macri,” said Monica de Bolle, academic director for Latin American Studies and Emerging Market Specialization at Johns Hopkins School for Advanced International Studies. “You’ll probably see frustration driving the vote, which could revive crazy, populist politics.”

If there is a silver lining, it’s that Argentina’s most ardent populists remain in disarray, starting with Peronist headliner Fernandez, who’s answering to multiple charges of graft. But that’s small comfort to Macri, who now has little choice but to deliver the austerity he avoided and risk voter backlash.

Mac Margolis

Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. -- Ed.