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OPINION AND ANALYSIS | 07-07-2018 08:39

To catch a falling knife

The Macri administration needs to build confidence through a new strategy that involves an economic plan that is both sensitive to the current social and political reality.

No matter how much one choses to believe in absolute truths, the reality we live in is most clearly defined by its relativity, by the fact that things are fluid, shapeless, and constantly in motion. Rather than relying on a positivist worldview in order to understand the social phenomenons around us, Mauricio Macri and his government would do well to rely on the concept of uncertainty, that teaches us that we can never be sure of the exact position of a particle, rather, we must try to calculate the probabilities that things will be as we expect them to.

Economics, of course, is not a hard science but a social endeavour, meaning that the fickle and changing wills of human beings — many times irrational — are important factors in determining future outcomes. In the same way as Macri’s rise to power brought unprecedented and even exaggerated optimism regarding Argentina’s prospects, today’s dire economic situation shouldn’t be a reason to believe the fate of the nation is doomed. In order to revert the situation, though, Macri and his Cabinet Chief Marcos Peña need to regain the faith of those sectors of society truly interested in getting out of this mess. And for that, they need at least two things: a good plan, and to stop lying.

The never-ending run on the peso, coupled with increased expectations for a recession have forced many economic prognosticators to come out with aggressive proposals to normalise current macroeconomic misbalances, many of them calling for some sort of shock treatment without regards for its consequences. A steeper devaluation of the peso vis-à-vis the US dollar, even more aggressive belttightening, and whatever combination of orthodox economic policies seem to be the only solution to this current bout of stagflation, according to them.

Several economists are now projecting a recession that could last well into 2019. Inflation expectations for June are between 3.5 percent and 4 percent according to private estimates, while full-year figures hover around 30 percent, meaning an acceleration over 2017. GDP growth could actually stall, while Rofex dollar futures for January 2019 currently stand at 34.77 pesos. Argentina’s major agricultural export, soy, has seen its price slide to its lowest in nine years due to Donald Trump’s trade war with China, while foreign direct investment — which grew 253 percent in 2017 — is already faltering. Despite the worst volatility in the Merval stock market index in the past four years, the value of dollar has seen relative calm over the past week, but that hasn’t stopped international investors in pushing Argentina’s default rate — as measured by credit default swaps (CDS) — to rise above Greece’s. Interestingly, market participants are talking about the “monetary tourniquet” put in motion by Luis Caputo’s Central Bank, yet the monetary base is growing at an annual 23 percent clip, which is the slowest since 2016.

Macri’s surprise electoral victory in 2015 has been lauded as genius from a strategic standpoint, with their communication strategy — crafted by star Ecuadorean adviser Jaime Duran Barba and executed by Marcos Peña — seen as brilliant. Throughout his first two years in office, Macri and his Cabinet effused optimism, promising things that never materialized like a downpour of foreign investment, an economic recovery, and an end to inflation. Communication and optimism can have a normative effect on reality, and indeed it did, giving Macri and several of his closest allies incredible figures in public opinion polls. Buenos Aires Governor María Eugenia Vidal was being discussed as Macri’s successor after the president’s sure reelection in 2019, with the unintended help of former president Cristina Fernández de Kirchner who would continue to divide the Peronist opposition.

The world bought the whole act as well, with The Economist, the Financial Times, Bloomberg, and most major business publications across the globe signing Macri’s praises as the slayer of populism. But something was off as Macri’s repeated promises failed to come to fruition. And they came to a sad end when in late December, former Central Bank president Federico Sturzenegger was publicly humiliated by Peña and the President’s economy men, Caputo — then finance minister — and Economy Minister Nicolas Dujovne, rejecting the Central Bank’s inflation target as impossibly optimistic. Sincericidio we would say, a juxtaposition between sincerity and suicide. Note that in monetary policy, communication is a key tool used to set future expectations in addition to the monetary base and the interest rate.

In last Sunday’s Perfil, Gustavo González explored the government’s swing from extreme optimism to absolute pessimism in a column titled ‘El neopesimismo macrista.’ “This neopessimism reflects the state of shock of the government,” González wrote, “neither that initial Macrista optimism was extent of electoral strategy, nor is this neo-pessimism separated from the necessity of changing a [communication] tool that by its excessive use has become useless.”

As González explains, the Macri administration needs to build confidence through a new strategy that involves an economic plan that is both sensitive to the current social and political reality. Obsessed with targeting the fiscal deficit, the government’s marriage with the International Monetary Fund suggests it will rely on austerity to achieve its longer-term goal. While it is imperative to find a solution to the deficit, it’s also important to find an answer to Argentina’s chronic lack of productivity. Instead of only focusing on how to cut, the government should find ways to make businesses thrive, which in turn would generate jobs and consumption, which happens to be the major component of GDP. In order to do this, it should negotiate with the opposition, devise a sector by sector plan, and work to avoid a painful recession.

By running for the presidency, Macri knew that winning meant catching a falling knife over and over again. The violence of the latest devaluation and the coming recession mean the rest of the country is once again catching knives. It’s not too late for the government to find its way.

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Agustino Fontevecchia

Agustino Fontevecchia


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