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OPINION AND ANALYSIS | 09-11-2019 11:18

Wishful thinking

At some point, the cepo will need to be relaxed if Alberto’s pan-Peronist coalition dreams of attracting foreign investment. At some point, the situation will turn explosive.

It is troubling, to say the least, that president-elect Alberto Fernández hasn’t made clear his plans to “put Argentina back on its feet,” as his campaign slogan went. The information that has begun to make its way out is at best hearsay, particularly as there hasn’t been any direct confirmation yet of who will form part of his cabinet, despite heavy speculation as to the composition of his economic team. With the eccentric Matías Kulfas positioned to lead the pack, the only concrete concepts to expect beyond December 10 are tied to a “social pact” that is supposed to magically jumpstart the economy, coupled with heavy money-printing, and a tough stance in terms of the debt renegotiation with the International Monetary Fund and private creditors.

A false sense of calm had taken over Argentina since the October elections. Most relieved of all, it seemed, was President Mauricio Macri. Not only did he secure a major comeback in terms of his coalition’s electoral outcome, coming back from a humiliating defeat in the PASO primaries to a “dignified defeat,” but he had guaranteed the conditions to become the first non-Peronist president to finish his term in a nearly a century. Unfortunately, the mechanism through which he bought stability is extremely corrosive to Argentina’s economy: capital controls, known colloquially as ‘el cepo.’

Through hardened currency controls, the Central Bank led by Guido Sandleris has managed to put a lid on the draining of foreign reserves, a major preoccupation of the president-elect. Yet, the cepo has destroyed economic activity. The black market rate has begun to take off, with one of the several parallel rates reaching some eighty pesos to a dollar at one point, as people have been limited to a mere US$200 per month in offical dollars. It’s clear that while Macri’s extreme liberalisation of the foreign exchange market had the unwanted effect of feeding intense capital flight, currency controls are the worst enemy, not only of economic activity but also of foreign direct investment.

One clear example can be seen in the energy sector, where the Macri administration’s populist freeze on gas prices has cramped production at the Vaca Muerta shale formation. YPF, the stateowned energy firm, has found itself locked out of international debt markets, meaning it has been forced to use cash instead of refinancing its debts. That cash could have been used for productive investments, much needed in the capital intensive world of non-conventional production.

Yet, Macri will leave the economy with a cepo, just as he received it. And Alberto and his team will most probably keep that cepo in place. At the root of the issue are two interrelated situations: the need to control inflation and the need to renegotiate Argentina’s debt.

Starting with inflation, our country’s true cancer, Alberto and his team’s magical solution is a “social pact” which will come with some sort of agreement with producers regarding prices and wages. This will also include the generally conflictive union sector, which has already expressed its support for Fernández and his running-mate, former president Cristina Fernández de Kirchner. The social pact would most probably raise wages while keeping prices fixed for some 180 days, while at the same time include money printing in order to “put money in people’s pockets.” This, given inflationary momentum after finishing 2019 with price increases of around 60 percent, is extremely troubling. Some economists have justified the expansion of the money supply given the tourniquet put in place by Sandleris’ Central Bank, noting that inflation is “not a monetary phenomenon” and that stationary peso demand rises in December. The social pact should put a lid on inflationary expectations for the coming six months, despite a flooding of pesos that will not be absorbed or sterilised. As short-term papers, Leliqs, aren’t renewed, the wave of pesos will grow. At some point, the cepo will need to be relaxed if Alberto’s pan-Peronist coalition dreams of attracting foreign investment. At some point, the situation will turn explosive.

In parallel, Alberto’s teams have only held informal meetings with Argentina’s creditors. The biggest problem will be the IMF, which Alberto has criticised consistently, asking them to own up to Macri’s economic failure. The IMF’s preferred creditor status can become problematic, as Wall Street is looking to them to take the heat. Yet, the multilateral institution claims the banks have to suffer so that “moral hazard” keeps the system honest. Throughout all this noise, Alberto repeated this week in Mexico that Argentina cannot pay its debts in these conditions, and that he needs the economy to grow.

The catch-22 is evident: in order to put Argentina’s finances in order, Alberto and his team need to renegotiate the terms on the sovereign debt and relax capital controls. The negotiation needs to be resolved quickly, as it is a prerequisite of lifting some parts of the cepo, but the rhetoric makes that unlikely, as does the limited progress made thus far. Acting Finance Minister Hernán Lacunza has called on Alberto’s team to join him in an initial negotiation to no avail.

Fernández’s secret weapon could be, weirdly enough, Donald Trump. The president of the United States called him to tell him how great a president Alberto would be. Through an interpreter, the president-elect thanked him, and told the press The Donald would help him out with the IMF. This last point wasn’t reported in the White House’s version of events. Trump, though, could need an ally in Alberto. His buddy Jair Bolsonaro is facing a difficult time in Brazil, while the wave of antiestablishment sentiment spreading throughout Latin America threatens the region’s stability and a return to leftist populism. Former Brazilian president Luiz Inácio Lula da Silva has walked from jail after nearly two years behind bars – he remains Brazil’s most popular politician. Chile is imploding, Ecuador has blown up, Evo Morales has secured a fourth reelection in Bolivia. Trump has proven he’s flexible when he wants to be, cozying up with Mexico’s Andrés Manuel López Obrador, who was the first leader Alberto visited as presidentelect.

Argentina needs to regain trust. Trust of its people, trust of the business community, investors’ trust. If Alberto Fernández manages to effectively renegotiate the debt on favourable terms, ease currency controls, and enact this “social pact” all in a relative short term, he may have won the trust of a group of people, having the main ingredient to curb inflation. If, and only if, all of this works perfectly (which I doubt), then he must enact unpopular reforms that Macri was unable to complete, including a reduction in social spending and pension payments. And, he must do this as the electoral cycle picks up pace again, with midterm elections in 2021.

Expecting all of this to flow seamlessly appears like wishful thinking. Let’s hope it’s not.

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Agustino Fontevecchia

Agustino Fontevecchia

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