Juan Germano en Financial Times – 4/05/2018

Argentina’s peso woes raise big question for emerging markets

Attacked by both left and right and under pressure from the markets, Mauricio Macri issued a plea for Argentina’s voters and investors to stick with his gradual approach to economic reform.

“We chose the path of gradual change so that no Argentine would be left behind,” the country’s 59-year-old president said in a broadcast from a shale field in Patagonia. “The other option would have been a shock adjustment.”

But since his broadcast last week, investors have stampeded away from the peso, even though Argentina’s central bank had carried out three hefty interest rate rises and spent more than $5bn to prop up the currency, now the worst performing in all emerging markets this year. It plunged almost 8 per cent against the dollar on Wednesday and Thursday.

Mr Macri’s gradualist approach has failed to address concerns about Argentina’s soaring current account deficit, high inflation and substantial budget deficit at a time when emerging markets are under pressure from the strong dollar and rising interest rates.

The question facing many investors is whether Argentina is an exceptional case, or instead a bellwether for emerging markets that have benefited hugely from years of loose US monetary policy now coming to an end.

After years of populist government under the country’s Peronists, Mr Macri embarked on a programme of changes to taxes, pensions and subsidies. But to minimise pain, he sought to implement the reforms slowly — as well as taking to international debt markets to maintain or expand expensive social programmes.

“This can only end badly,” said Javier Milei, an economist who argued that gradual economic reform had never worked in Argentina over the past 70 years.

Mr Macri’s government is slowly bringing down the country’s primary fiscal deficit — the difference between expenditure and revenues excluding the cost of interest on debt — and, in response to the market turmoil, tightened its budget target on Friday.

But Mr Milei argued that Argentina’s most recent crises, including an economic meltdown in 2001, blew up when the overall fiscal deficit was lower than today. In 2001, the country’s consolidated fiscal deficit was around 7 per cent. Now, Mr Milei said, the figure was more than 9 per cent when central bank debt was included. One reason was elevated interest payments. Mr Macri’s government had borrowed more than $100bn in foreign currency — more than any other emerging market in the past two years.

It is in Argentines’ genetic code to worry when they see the central bank selling reserves. And to think that it might be ineffective, that’s just the worst thing that could happen Luis Secco, economist The president’s policies have also widened the country’s current account deficit, which doubled in dollar terms last year to $30bn — some 5 per cent of gross domestic product.

Local investors are nervous, particularly after the central bank cut its inflation target late last year and then lowered interest rates in January. Both acts were widely seen as meddling by Mr Macri’s administration. The bank’s more recent actions — which, as well as depleting reserves, took interest rates to 40 per cent on Friday — have evidently failed to restore full confidence.

“It is in Argentines’ genetic code to worry when they see the central bank selling reserves. And to think that it might be ineffective, that’s just the worst thing that could happen,” said Luis Secco, an economist.

One worry is that while the central bank is eager to prevent a slide in the peso, which would increase inflation and make foreign-currency denominated debt much harder to service, its firepower is limited.

Central bank reserves fell from $64bn in January to $55bn on Wednesday, wiping out almost all the $9bn raised from eurobonds issued at the start of the year.

But Argentina was also buffeted by factors affecting other vulnerable emerging markets, notably the increase in debt and the dollar’s rise.

Recommended Lex Argentina: more tango than cash In that sense, its predicament may bear a greater resemblance to the Mexican peso crisis of 1994 or the Asian crises of 1997-98, which were part of much broader international financial ructions, than to its own 2001 crash, which was largely self contained.

Sonja Gibbs, senior director of the Washington-based Institute of International Finance, an industry association, argued that investor concerns about emerging markets generally were strongest about debt.

The IIF’s figures showed that foreign investors bought just $300m of EM bonds in April, down from more than $39bn in the first quarter.

Ms Gibbs said that with greater volatility, a stronger dollar and rising interest rates, “investors have become a lot more discriminating about emerging markets”.

But in the case of Argentina, Mr Macri still has political room to manoeuvre, despite opposition to his reforms from the unions and the left and criticisms from conservatives that they do not go far enough, fast enough.

Juan Germano, a pollster, said that the president still enjoyed approval ratings of nearly 50 per cent. After their chaotic years in government, the Peronists have scored only mediocre results in recent elections. Fausto Spotorno, chief economist at Orlando Ferreres y Asociados, added that Mr Macri’s gradualism is sustainable for as long as there is access to international finance for the next four to five years, when the government plans to have eliminated the deficit.

Between now and then, higher global interest rates may force the government to speed up the fiscal adjustment, but it would not derail the programme, he said. “But if there is a global financial crisis of the order of the subprime crisis, then that could send it off the rails — or at least push it to the edge of the precipice.”