Wednesday, April 8, 2020

OPINION AND ANALYSIS | 28-04-2018 09:36

Nobody loves you when you’re down and out

As Sturzenegger fires blanks at the forex markets to keep a rising dollar from translating into prices, Macri has begun to pay the political price of failing to deliver on their campaign promises of inclusive economic growth and lower inflation.

Once I lived the life of a millionaire, spendin’ my money I didn’t care

I carried my friends out for a good time, buying bootleg liquor, champagne and wine.

When I begin to fall so low, I didn’t have a friend and no place to go,

So if I ever get my hand on a dollar again, I’m gonna hold on to it ‘til them eagles grin.

Nobody knows you, when you down and out,

In my pocket not one penny, and my friends I haven’t any.   

                                                                                              -Jimmy Cox, 1923


Argentina’s eternal pressure valve, the value of the US dollar, shot up dramatically throughout this week, hitting historic all-time highs and forcing the Central Bank to pump more more than US$4 billion to try and keep it under control. Against his best wishes, Central Banker Federico Sturzenegger, a monetarist, intervened aggressively to protect the president’s political project, as Mauricio Macri’s main electoral promise was the taming of inflation, an area in which his administration is falling well behind its own expectations. The greenback’s continued strengthening, coupled with the widespread belief that the peso is substantially undervalued, came vis-à-vis important hikes in public service rates that hit the pockets of the lower and middle classes particularly. To tie it all together, a series of surveys show that Macri’s standing with society has fallen dramatically since winning last year’s midterm elections, registering the highest disapproval rating after Cristina Fernández de Kirchner and disgraced union strongman Hugo Moyano. It was only five months ago when, after having dealt a decisive blow to the political aspirations of Fernández de Kirchner, Macri’s approval rating had climbed to a peak, with some polls putting the spread with his disapproval figures as high as 21 percentage points. Counterintuitively, politics, it seems, comes easier to the ruling Cambiemos (Let’s Change) coalition than economics, despite their centre-right platform and the private sector expertise of its Cabinet and president. Emboldened after defeating the Peronists once again, they embarked on an ambitious journey to reform the country to their liking, only to hit a wall time and again, starting with the violence surrounding the previsional reform and the blunder that was the year-end press conference where Marcos Peña raised inflation expectations unnecessarily.

To put things in context it’s important to understand the facts. Since taking office, Macri and his economic team have promised to normalise Argentina’s macroeconomic variables, which, after 12 years of populism, had led to massive imbalances, particularly in terms of internal prices and inflation. Alfonso Prat-Gay, Macri’s first economy minister, oversaw the seamless move out of currency controls and into a controlled float, as the peso had been artificially supported by the Kirchners. At the same time, embattled Finance Minister Luis “Toto” Caputo has raised hundreds of billions selling sovereign bonds to finance monster deficits thanks to the new and improved relationship Argentina has with the international community, one Macri’s greatest successes.

Inflation has halved, which is great, but is more than twice as high as the president had promised, in part due to strategic errors. When the going got tough, as economic growth was meagre, Cabinet Chief Marcos Peña decided to intervene the Central Bank, which had been pursuing an orthodox and very strong high rates policy to contain inflation, admitting that inflation in 2018 would be 20 percent rather than the original 15 percent promised by Sturzenegger. Inflation expectations naturally jumped, while economic output hasn’t accelerated at the expected rate, which would’ve have been impossible in a matter of months. Thus, growth in the agro-exporting sector, along with construction (due to public works), finance (thanks to Sturzenegger’s sterilising Lebacs), haven’t been enough to compensate stagnant or falling real wages and therefore consumption. Add to that a staggering trade deficit and a stubborn primary deficit which, along with everything else, continues to spook investors.

Bringing it back to this week, the dollar has been on an aggressive surge since the end of 2017, when Peña and the rest of the economic team figuratively slapped Sturzenegger in the face. Year to date, the peso’s slide against the dollar has amounted to 10.4 percent. This week, it surged to historic highs (21.20 pesos), which would’ve meant a five-percentage-point move in a single week, before Sturzenegger came to the rescue, selling dollars and even raising interest rates, reversing his previous policy reversal and sending even more jitters into already jittery forex markets. Since March, the BCRA (Argentina’s Central Bank) has spent some US$6.8 billion in order to keep the dollar at bay. It probably hasn’t helped that global markets have priced in further rate hikes by the Federal Reserve — the US central bank which controls the global reserve currency — and that worried Wall Streeters are calling Fed Chairman “Mr. Magoo.” As rates on US Treasuries hit their highest levels in four years, global investors will move capital from emerging markets to dollar denominated assets, meaning more upward pressure on the peso-dollar exchange rate.

As Sturzenegger fires blanks at the forex markets to keep a rising dollar from translating into prices and therefore inflation, Macri and his political party have begun to pay the political price of failing to deliver on their campaign promises of inclusive economic growth and lower inflation. The aforementioned increases in public services were disputed both by the Peronists and the Unión Cívica Radical, who are Macri’s allies. In the streets, people are hurting, as electricity prices have risen on average 560 percent in the past two years, water bills are up 330 percent, and gas jumped 220 percent, leading to widespread protests against the president. The conflicts have reached the president’s inner circle, with Clarín reporting on a vociferous fight between Sturzenegger and powerful Deputy Cabinet Chief Mario Quintana, and even star advisor Jaime Duran Barba quoted as saying, “Mauricio’s image has shed 10 points, if it continues to drop I’ll face off with any minister looking for further belt-tightening.” Macri’s strategy, it seems, is to deliver all the bad news together, hoping that the second half of the year will result in falling inflation and visible economic growth. If his political project is to succeed, he needs to deliver.

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Agustino Fontevecchia

Agustino Fontevecchia

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