Flag Day marked by a return to emerging market status, followed by a catastrophic World Cup result the next day – contrasting fortunes for Argentina this month indeed. June has been a highly volatile month marked by a run on the currency which a US$50-billion standby agreement with the International Monetary Fund (IMF) failed to halt (at least initially) and which caused a change of Central Bank helm as the dollar brushed the 29-peso mark. Yet the replacement of Federico Sturzenegger with Finance Minister Luis Caputo was not the only novelty – the energy and industry sectors of the real economy also saw change. Yet Flag Day, on the eve of midwinter, came gift-wrapped with not only a return to emerging market status but also formal approval of the IMF agreement, thus releasing the first US$15-billion tranche.
So does Argentina now turn the corner after almost a decade as a frontier market? Hard to say at present. Wednesday’s promotion of status by MSCI (Morgan Stanley Capital International) was not so much a reward for economic prowess as for liberation of capital movement. And that freedom can cut both ways. On the one hand, it vastly expands the scope for the inflow of all too scarce dollars (not least from the major global investment funds inhibited from buying into frontier markets) on top of that US$ 15-billion tranche. Yet quite apart from the fact that such money will obviously favour the financial over the productive sector (a capital which can leave as easily as it comes, unlike investment in plant), this inflow of dollars might well revive the overvalued peso of the last two years, which has conspired so much against Argentina’s economic base being competitive. Either way the crisis is far from over – this year’s growth stands to be a lot lower and inflation much higher than forecast a couple of months ago, as freely admitted recently by Treasury Minister Nicolás Dujovne.
Furthermore, these brighter horizons promising to turn the scarcity of dollars into a relative abundance certainly offers the government relief but it also introduces an extra pressure – namely, the onus to come up with an economic plan now that the IMF and global finance seem willing to invest and back President Mauricio Macri’s administration. And there has been little sign of that in the last 30 months with gradualism no substitute – do too many cooks spoil the broth with Macri’s multiplicity of ministers? Even if limiting policy to the financial sphere there does seem to be much clarity – on Tuesday Caputo celebrated renewing most Lebacs but the agreement with the IMF is to phase them out. Furthermore, half the US$15-billion tranche is earmarked for exchange market intervention to hold the dollar back when the IMF is insisting on a free float. Yet that contradiction is not necessarily an error, considering the ravages which devaluation is causing in the macroeconomic indicators as well as the complications for collective bargaining.
Yet the worst thing the government could do would be to make public its difficulties in drafting an economic blueprint – given the uncertainties, what Macri urgently needs is a change of agenda, as has already been attempted with the legalisation of abortion (designed as a carrot for progressive sectors but also divisive within his own ranks). Something which might well happen with or without the government since the 2019 electoral campaign has long shown signs of making a premature start – elections which Macri might well win if next year compares favourably with a disappointing 2018 just like last year with the stagflation of 2016. In short, “emerging” remains the operative word – however, nothing has yet emerged.