Hopes are growing Argentina’s self-imposed economic wounds will gradually heal, and the country’s stalled reform agenda will be kick-started by a new political generation of pragmatists.
Martín Redrado, the former governor of Central Bank of Argentina between September 2004 and January 2010 – before a falling out with the administration of president Cristina Fernández de Kirchner over the monetization of deficits – tells Euromoney in an interview the political complexion of the incumbent party, which faces re-election in October 2015, is changing.
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| Martín Redrado, former governor of Central Bank of Argentina |
“We have to ask: what is the Peronist party today?” says Redrado, who advises several potential presidential candidates on economic policy. “The party has a new generation of leaders at the mayoral and gubernatorial levels. They have a much more practical approach to problem-solving. They are consensus builders. “The next presidential leader is likely to come from that group of people.”
Under the rules of the federal constitution, Kirchner is not able to stand for re-election. Furthermore, according to surveys by consulting firm Poliarquía, only 25% of the population has a favourable perception of the government’s policies.
Any new administration would require the political capital to implement an orthodox shift in economic policy that would see a sharp rise in interest rates, tighter fiscal policy and a cap on public-sector wage increases, say economists. Over the past week, the Argentina peso fell as much as 20% against the dollar amid dollarization pressures, rampant inflation and social unrest.
Miguel Kiguel, executive-director of Econviews, an Argentine economic consultancy – and the country’s former finance secretary – echoes Redrado’s optimism that reforms could be forthcoming given the currency crisis.
“Given that Argentina suffers from mismanagement as opposed to serious fundamental problems, a new economic team should be able to quickly generate confidence and significantly alleviate the external situation,” he says.
Few economies have been as badly managed as Argentina in recent years. The government has raided the central bank’s coffers for dollars, as the sovereign is barred access from international capital markets, while, at the same time, running an expansive fiscal policy, without meaningful tax-collection reform.
As a result, the government has engaged in a battle to stem off a fall in foreign reserves, as Argentines accelerated purchases of US dollars as a hedge against devaluation and inflation last year, while the government typically needs $11 billion alone per year for imports of oil and associated energy products.
“Since 2010, the central bank has been printing a lot of pesos,” says Redrado. “The money supply has tripled and there are a lot of new notes in circulation.”
In November, upon the appointment of a new cabinet, the pace of currency depreciation began to decrease, freeing up reserves, while the government introduced tax increases and curbs on dollar purchases.
Nevertheless, the sovereign was caught off-guard by the emerging-market (EM) rout this year that saw a free fall in the peso and no coherent strategy to deal with rising FX market stress, reawakening fears of medium-term Argentine default risk and a balance-of-payment crisis without redress.
A tentative recovery in global EM risk appetite from the January/early February lows has given the government more breathing space, while a couple of modest supply-side measures, including a new agreement with Repsol, a Spanish oil company that has reached a $5 billion settlement with the government, and a new inflation index have fed cautious optimism among some observers that the economy might have bottomed out.
Ben Sarano, portfolio manager with EMSO, an independent fixed-income asset manager, said at a London forum of the Emerging Markets Trading Association earlier in the month, that Argentina default-risk was lower than that of Venezuela and Ukraine.
“I am relatively optimistic on Argentina,” he says. “I see an easy ride for local-law [debt] instruments, not affected by adverse [legal] ruling in New York [which declares the sovereign materially non-compliant on hard-currency debt obligations, closing off international capital-market access].
“Efforts to shore up reserves means there is an easy way through [for the economy] until 2015 elections and there are positive surprises, especially in terms of agreement with Repsol. The government is now focused on brining money into the economy. As a result, Argentina is best of the three [Venezuela and Ukraine].”
Nevertheless, the economy faces structural FX pressures that will test foreign reserves, at $29 billion, which means the risk of a credit event remains at elevated levels.
Javier Finkman, Buenos Aires-based economist at HSBC, reckons the Argentine peso won’t achieve fair value for another two years, estimating the currency is overvalued by a quarter, current policies will continue alongside a 25% “constant” inflation rate.
“Without correction, a strong local currency fuels the expectation of additional devaluation – and inflation – which, in turn, promotes portfolio and behaviour dollarization,” he notes.
Eugenio Alemán, economist with Wells Fargo, notes: “While the limited measures the government takes today probably will delay the day of reckoning, it will be difficult to avoid a balance-of-payments crisis in the near future if reserves continue to fall.”
As a result, economists say there are three options, including an orthodox shift in economic policy and a temporary fudge that sees “the formalization of a multiple exchange-rate regime,” according to ING.
The final option – a continuation of the status quo in the absence of post-election reforms – will surely lead to devaluation, an inflationary spiral and social unrest.
Kirchner is likely to see out her full term until the start of 2016, but her popularity, which has taken a hammering and stands at less than 30%, is likely to plummet even lower.
Peronist and non-Peronist presidential candidates would like to see her take the hard decisions to turn the economy around, but it is not yet clear if she is prepared to do them that favour. Markets are, therefore, banking on a new generation of post-election reformists.
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| Source: Bloomberg via @Pawelmorski |