The steep devaluation of the peso and the Mauricio Macri administration’s move to ask for an advancement of funds from the International Monetary Fund (IMF) has raised alarm among economists, many of whom are concerned about the severity of the crisis facing Argentina.
In an interview with the Times, Rodrigo Álvarez, the CEO of Analytica consultancy firm, explains why Argentina was vulnerable to a crisis, why achieving a zero fiscal deficit is possible and why he welcomes the president’s decision to reinstate export duties.
Was the decision to reinstate export duties the right move for the economy?
The country is facing a crisis and there wasn’t much more room for the state to keep reducing its expenses. Public works are already paralyzed, and subsidies and social expenditure have already been heavily reduced. Export duties can help to increase revenue from a sector that has benefitted from the devaluation. The income will help to bring calm to creditors and set the fiscal situation quickly in balance. It’s one of the tools the government has to hand.
Economically, what will be the outcome for the last part of Macri’s term that lies ahead?
Every devaluation is a restart of the economy. The main accomplishments of the Cambiemos (Let’s Change) administration, such as lower inflation and [a lower] poverty rate and higher economic growth, were lost because of it.
We are facing a steep drop of people’s income and purchasing power. The only sector that is pushing the economy forward are exports. But Argentina doesn’t export that much. The recovery in 2019 will be very slow.
Is a zero deficit a feasible goal?
Yes, it can be reached. Nevertheless, the real problem is the lack of US dollars in the economy, not only the fiscal situation.
The IMF says the fund’s dollars should be used to pay debt, while the government claims that if it doesn’t intervene in the exchange rate, the situation will get more complex.
So, there’s a tension between the public sector and the IMF – and finding a balance will be difficult.
Macri blames the economic woes on the wider, global context. Is that the only reason?
[The global context] has caused problems, but Argentina was also in a very vulnerable position, one linked to the inheritance from previous administrations and to mistakes made by the current government.
Having an inflation target led to complications and speculations, as well as the large amount of debt taken on. Having a vulnerable economy with a high volatility of capital and investors with a lot of Argentine bonds can have a destabilising effect.
Will the decision to cut the number of ministries lead to significant savings?
It was a move mainly to show that the public sector is also making an effort. A part of society considers that the state and its structure holds some blame for the economic situation but it’s much more complex than that.
The government is trying to level the negative impacts with decisions such as this one and the export duties.
With the recent devaluation, has the exchange rate reached a level of equilibrium?
There’s not a level of equilibrium for the exchange rate, especially with the current record speed of capital outflow.
We are losing all the dollars that we are making with exports because of royalties and debt payments. That can have a destabilising effect if you add the capital outflow.
The exchange rate doesn’t respond to the laws of supply and demand in Argentina. When the peso devalues, there’s a larger demand of dollars and supply disappears.
It’s a self-fulfilling prophecy.