Argentina’s new president Mauricio Macri has wasted little time in implementing a raft of reforms. But given the scale of the challenges and until official economic data can be believed, investors will reserve judgement on the new administration.
- Argentina has a long and inglorious track record of defaulting on its debt
- On December 17, the government of Argentina’s new president Mauricio Macri abandoned the peg to the US dollar allowing the peso to decline by around 30 per cent
- Other measures introduced by the Cambiemos Alliance government include the scrapping of tariffs on wheat, beef and corn, reducing the tariff on soya beans and allowing international companies repatriate their earnings
- The president will now need to tread carefully in the upcoming negotiations with trade unions as the agreement could further fan inflation
- On 30 December new economy minister Prat-Gay declared a “national statistical emergency” and the suspension of published economic data
Reliable data is one of those non-negotiable factors that any bond issuer, sovereign or corporate, must provide to win the trust of investors. When a borrower’s numbers don’t stack up, the consequences are stark and long lasting. The ongoing Greek debt tragedy is a case in point. Shortly after becoming Greece’s prime minister in October 2009, George Papandreou revealed the country’s budget deficit for that year would be 12.7 per cent of GDP, more than double the official estimate that had been published previously. The announcement destroyed investors’ trust in Greece, something the promises of Papandreou and four subsequent prime ministers have been unable to repair.
Argentina, like Greece, has a long and inglorious track record of defaulting on its debt; of its governments telling investors: “This time is different”, before proving it isn’t. When a country has defaulted on its external debt eight times, as Argentina has, including the US$100 billion episode in 2001 that was, at the time, the largest ever sovereign default, it pays to be circumspect.
This remains the case, despite the efforts of the newly installed centre-right ‘Cambiemos’ coalition led by president Mauricio Macri to hit the ground running in implementing reforms. In a few short weeks they have passed a raft of changes aimed at restoring Argentina’s economy and improving international trade. On December 17, the country’s new economy minister, Alfonso Prat-Gay, neatly undid four years of capital controls introduced by the populist president Cristina Fernandez de Kirchner, wife of the previous president, who together had remained in power for the last 12 years.
The controls were imposed to combat Argentina’s runaway inflation and protect the government’s foreign exchange reserves, but instead spawned a thriving black market in US dollars and forced the Kirchner government to spend its precious dollar reserves to defend the peg. Known locally as “the clamp” (or el cepo in Spanish), the controls made it virtually impossible for ordinary Argentines to buy dollars, the long-favoured preference for savers attempting to side-step the inflation-prone peso. In doing so, it forced the trade underground. The extent of this trade was demonstrated on the first day of trading after the capital controls were dropped, when the peso fell from its peg of 9.8 to the US dollar to around 13.30 – closer to the so-called ‘blue-dollar’ rate of 14.5 that prevailed when the peg was still in place.
In theory, the move to allow the peso to float freely should benefit the country’s agricultural exporters, who in the face of a severely overvalued peso – and steep tariffs imposed by the Fernández government – were hoarding large amounts of grain. It should also oil the wheels of industry by enabling importers to obtain the dollars they need to stock their factories.
Other measures introduced by the Cambiemos Alliance include the scrapping of tariffs on wheat, beef and corn and reducing the tariff on its biggest export, soya beans. Major international companies will also now be able to repatriate their earnings, which will come as some relief to those that have just taken a 25 per cent hit to their mandatory peso holdings following the currency depreciation. Elsewhere, income taxes have been cut and a new central bank president appointed, along with two Supreme Court justices.
However, the move is not without risk. A free-floating peso could well unleash inflation once more, while retailers fear the drop in spending that could accompany the reduction in purchasing power. But Macri and his team have been busy securing short-term financing from a cadre of international banks. They also built their dollar reserves ahead of the devaluation. By converting some of the central bank’s yuan holdings to dollars, they have cobbled together a war chest for the bank’s new president to defend the peso at around the 15 per dollar level.
Even so, the central bank has already raised short-term fixed deposit rates by eight per cent to 38 per cent and may have to raise them still further in the battle to stabilise the peso and contain inflation. And this is only the first round for Mr Macri’s government. To keep interest rates from spiralling still further, round two will require the reining in of the country’s vast budget deficit. This could be costly to economic growth which is already in negative territory – Barclays Research quotes -1.1 per cent GDP growth for 2015 – while any austerity measures are bound to prompt support for the country’s recently departed populist government.
This means the president will need to tread carefully in the upcoming negotiations with trade unions. Any largesse in agreeing inflation-based wage increases may further fan inflation.
Despite surprising the market with the speed of its early reforms, an even bigger challenge lies ahead in convincing the market that Argentina’s economic data can be trusted.
Argentina’s inflation numbers need particular and immediate attention. Amidst allegations the figures had been doctored by the previous government in an effort to reduce payments on inflation-linked debt and to placate investors and consumers, Argentina in February 2013 became the first country to be censured by the International Monetary Fund for failing to provide accurate data on inflation.
The IMF has subsequently refused to use Argentina’s official statistics in its analysis. In June 2015, the IMF said Argentina had failed to take sufficient steps to improve quality of economic statistics in line with global standards, leading it to extend a review of Argentina’s data provision by another year.
The official inflation figure for October was 14.3 per cent, well below the 25 per cent average of private estimates compiled and published by Congress. A similar discrepancy exists between official and independent assessments of the budget deficit; with the former estimating a number around 3.5 per cent for 2015, half the level of some private estimates.
Jorge Todesco, the new head of INDEC, Argentina’s official public statistics agency, illustrated the task ahead in restoring confidence in Argentina’s numbers; admitting to Reuters there was a “widespread state of chaos in the statistical bases”. With economy minister Prat-Gay on 30 December declaring a “national statistical emergency”, Todesca confirmed INDEC will suspend publication of data on GDP, inflation and poverty until the numbers can be trusted.
No timeline has been given on when INDEC will be able to resolve this issue. But until Argentina is able to trust its own economic data once again, it can hardly expect international investors to give it their backing.