2018: Just Another Year in Argentina
To call 2018 a difficult year for Argentina would be an understatement — the country has suffered more economic turmoil this year than most countries experience in a decade. But 2018 has shown that a year rife with financial crisis is just another year in Argentina.
For our final issue of the year, The Essential looks back at the last rocky twelve months. 2018 left Argentina’s future uncertain, but also catapulted the Latin American nation to a new level of international recognition.
Sowing seeds of doubt
After sustained economic growth for the first half of market-friendly President Mauricio Macri’s time in office, analysts and economists held high hopes for Argentina’s 2018 performance. But a series of unfortunate events would throw Argentina’s economy into a tailspin, dashing any hope of growth.
The first of these was a sweltering summer drought that withered Argentina’s soy, wheat and corn crops, wiping out any chance of a trade surplus. The drought cost Argentina an estimated $3.4 billion dollars, and was considered the worst drought in 30 years.
Argentina’s twin deficits — a huge trade deficit, coupled with its already large fiscal imbalance — made the 2018 economic forecast look risky for international investors. Because Argentina holds around 70 percent of its national debt in foreign currency, the financial outlook shook investor confidence in the country’s ability to service its $13.3 billion in international debt set to mature in 2019 while still meeting its other financing needs.
By March, firms on Wall Street had caught wind of Argentina’s precarious situation. As economists predicted high rollover risk in the short-term bond market, investors cashed in their peso-denominated Treasury notes, known as Lebac. The reverse of capital flows flooded the foreign exchange market with pesos, sending the currency’s value tumbling.
The capital flight, spurred in part by US Federal Reserve interest rate hikes, created a perfect storm that sparked a run on the peso in May. Argentina’s dollar debts became even more expensive, which in turn increased investor jitters over a 2019 debt default.
Meanwhile, Argentina repeatedly hiked its key interest rate in hopes of controlling the peso and reigning in runaway inflation, which is expected to end the year at 47.5 percent. The Leliq reached a jaw-dropping 60 percent — the highest in the world — and sent lending costs skyrocketing, killing any chance of economic growth while prices continued to rise.
Macri’s only option
Left with few options, the embattled president resorted to the unthinkable. Macri turned to the International Monetary Fund for a bailout — a risky move given the Fund’s reputation among Argentines for its role in the historic 2001-2002 debt default. Many called the decision political suicide, maintaining it would severely limit Macri’s re-election chances in 2019.
Sure enough, anti-IMF protests mounted throughout the Southern Hemisphere. Unions, civil society groups, and leftist political organizations staged strikes and massive marches, clogging Buenos Aires’ streets and shutting down ports, banks and public transit.
Disaster struck again as the US continued to raise interest rates. Turbulence in other emerging markets — namely a currency crisis in Turkey — caused international investors to again flee the volatile peso for safer US dollars. A massive corruption scandal implicating dozens of politicians, including ex-President Cristina Kirchner, sparked further distrust among investors.
To prop up the tumbling peso, Argentina’s central bank chief Luis Caputo began auctioning off US dollars — hundreds of millions per day — to capture liquid pesos on the foreign exchange market. But the strategy irked the IMF, which felt Caputo was squandering the Fund’s dollars. A day before Argentina announced an expanded $56.3 billion financing deal with the Fund, Caputo unexpectedly resigned.
But Argentina’s currency crisis, high interest rates and continued inflation were only the beginning of the story. The economy officially entered recession at the end of the third quarter, and manufacturing and retail industries have continued reeling through the holiday season.
Stabilizing the peso
With new central bank president Guido Sandleris at the helm, the new IMF deal also abandoned Argentina’s exchange rate targeting policy for a plan to restrict growth in its monetary base and introduce a crawling exchange rate band for the peso. The measures largely stabilized the volatile currency, allowing the government to focus on other financing needs.
But the IMF loan came at a price, and Macri had to speed up his fiscal belt-tightening measures in order to pass legislation to balance the budget in 2019. He levied painful taxes on grain exports, and continued to slash government spending by rolling back subsidies on public utilities, public transportation, and healthcare.
The austerity measures met steep resistance. When a protest against Macri’s budget bill turned violent in front of Congress in October, police fired rubber bullets and tear gas into the crowd.
Winning up global support
Despite Argentina’s economic turmoil and international embarrassment over fan violence during the Copa Libertadores soccer match, not all was lost in Argentina in 2018.
The country saved face by hosting a successful G20 summit. Government officials avoided a security incident by placing the city on lockdown, and guided world leaders toward a last-minute consensus on WTO reform. At the summit, Argentina signed trade and infrastructure investment deals with China and the United States, and made progress in patching up diplomatic relations with the United Kingdom.
Argentina’s fiscal crisis has settled, but its problems are far from over. Though Macri saw a boost in approval ratings post-G20, his chances at winning next year’s Presidential elections are slim at best. If the economy doesn’t rebound as expected next year, 2019 may prove even more difficult than 2018. But that’s just another year in Argentina.