Monday, July 6, 2020

OPINION AND ANALYSIS | 06-05-2018 19:24

The rabid Greenback and the failure of Macri’s economic policy

A lot to digest for Macri, who doesn’t count with a single Economy Minister, as is customary, but rather decided to split up the role in several ministries, thus diluting power and delegating decision-making power to the all-powerful Cabinet Chief, Marcos Peña.

Seeing Argentina being mentioned in the world’s top economic periodicals is an indication that in some way, President Mauricio Macri has won. Argentina is once again a relevant player on the global stage, friends with both US President Donald Trump and Russian Premier Vladimir Putin, holding the presidency of the G20, and close to being admitted to the OECD (Organisation for Economic Co-operation and Development) club of rich countries. At Davos, Macri was a rockstar, the prime example of a new wave of politicians that are not defined by ideology but pragmatism, having defeated populism through Facebook and Twitter, all the while promising to eradicate corruption.

Yet this week’s headlines had to do with something much more dangerous, something which is a consequence both of Argentina’s close ties with the rest of the world and a lack of a concentrated strategy to tackle the country’s deep macroeconomic imbalances across the board, rather than speculating politically. For nine consecutive days ending Thursday, the Argentine peso nosedived against the US dollar, forcing the Central Bank President Federico Sturzenneger to spend more than 10 percent of the country’s foreign exchange reserves and then raising interest rates three times in a week to a record 40 percent. The rabid Greenback, wrecking havoc across all so-called emerging market economies, had a particularly painful impact on Argentines, who also face one of the world’s highest inflation rates and consistent public service rate hikes that eat away at already weak purchasing power. All of this, of course, promises to derail Macri’s ambitious reform agenda and cause further instability after what had appeared to be a very smooth first two years in charge.

It’s a lot to digest for Macri, who doesn’t count with a single economy minister, as is customary, but rather decided to split up the role in several ministries, thus diluting power and delegating decision-making power to the all-powerful Cabinet Chief Marcos Peña. The peso hit an all-time low of 22.39 per dollar on Thursday, as the interest rate suffered a third consecutive rate hike — this time of 6.75 percentage points — to 40 percent, effectively halting the slide and ending the panic in the City of Buenos Aires. Throughout March and April, Sturzenegger sold US$6.8 billion in foreign exchange reserves as market participants gladly absorbed everything sent their way.

As has been the case with economic policy since the fateful December press conference — where Sturzenegger was publicly disqualified by his colleagues Peña, Economy Minister Nicolás Dujovne, and Finance Minister Luis “Toto” Caputo — the direction is unclear. Monetarist Sturzenegger, following in the steps of former Federal Reserve Chairman Ben Bernanke, stuck to the script: in order to tackle inflation he would use extremely high interest rates while reducing the monetary base through the sale of Lebac short-term paper, ignoring the costs of the carry-trade (la bicicleta financiera), and using communication as a monetary tool by setting extremely low inflation targets that should anchor expectations.

It worked, even though not as quickly as expected, leading to Macri deciding that Peña should take over economic policy making, favouring growth over inflation reduction. At the press conference, Peña et al announced that inflation expectations were actually 20 percent — in-line with the private sector’s estimates — and that they would respect the plan to reduce the fiscal deficit. Shortly thereafter, the Central Bank lowered rates. The move resembled those aggressive attempts at passing a pension reform package through Congress shortly after their midterm electoral victory, which, while successful legislatively, forced them to push back other bills (including the much-needed labour reform), and began an consistent slide in the president’s public image.

It should come as no surprise to anyone following the global economy that the reversal of the Fed’s easy money policies, as interest rates governing the global reserve currency rise, cause capital to flow out of riskier assets and into dollar-denominated assets. Indeed, Argentina was but one of the many victims of Fed Chairman Jerome Powell’s policies, as are the rest of the Emerging Market currencies including those used by Turkey, Poland, Brazil, South Africa, Mexico, and others. Adding fuel to the fire, Argentina’s aggressive debt-financing makes its finances susceptible to the value of the dollar, as the infamous 100-year ‘century’ bond’s currently valuation (trading below 90 to the dollar), as does the country’s record-high trade deficit. Not to mention lacklustre economic growth that has been concentrated in a few capital-intensive sectors that won’t spillover to the general population, a massive public deficit, and extremely constrained consumption in the face of public service costs that are still too low due to over a decade of populism. And did we mention the millions receiving state-backed assistance that is politically complicated to roll back? “It might be time to get out of Argentina,” Forbes’ Ken Rapoza wrote to investors in a piece that went viral this week (at press time it had more than 100,000 views).

Macri and his economic team are between a rock and a hard place, but it’s no time for weak decision-making. It’s clear that he took over a ticking-time bomb that was on its way toward becoming Venezuela under the leadership of ex-president Cristina Fernández de Kirchner and former economy minister Axel Kicillof. However, Macri’s gradualism is in crisis, as The Economist notes, given that the economy is still struggling to get back on its feet and inflation remains stubbornly high, the latter in great part due to a reversal in monetary policy that now appears to be behind us. Political commentators with good sources suggest Macri’s ego is too big for him to have a powerful economy minister — he did fire Alfonso Prat-Gay and Carlos Melconian from their posts after all, two strong economists with different backgrounds — yet his piecemeal approach to economic policy is reaching a point where he is running out of time for his policies to have the intended effect. During Néstor Kirchner’s first-term, deemed as successful in raising the country out of the hole it was in, he relied on the wise Roberto Lavanga, whom he eventually fired (Lavanga later went on to become a presidential candidate). Despite his ego, Macri should look for a strong figure to lead and head up the country’s economic policy.

Agustino Fontevecchia

Agustino Fontevecchia

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