eco TV

Argentina : a difficult situation for President Macri before elections


Argentina is going through very tough times with general elections end-October and extreme financial tensions. The government has had to impose a re-profiling of a part of its debt repayments and tighten fx controls. A brief focus on the situation. 

TRANSCRIPT // Argentina : a difficult situation for President Macri before elections : October 2019


François Doux:

With the approach of general elections on 27 October, we have Three Questions on Argentina.

François Faure, hello.

François Faure:


François Doux:

First question: how is Argentina’s macroeconomic situation? Are things very tense?

François Faure:

It’s worse than that. The situation is extremely difficult. First, this summer’s primary elections were won by Cristina Kirchner and Alberto Fernández, the underdogs.

François Doux:

That was an upset.

François Faure:

It was surprising that they could gain such a big lead over Mauricio Macri. That created a real buzz in the financial markets. Since mid-August, the exchange rate has fallen by 20%, and the currency has lost a third of its value since the beginning of the year. Inflation has accelerated again and is now expected to hit 55% by year end. All of this is occurring against a very tough macroeconomic background: the economy is in recession and has contracted nearly 7% over the past 12 months. Given all the financial stress, economists have further downgraded their growth forecasts.

François Doux:

Second question: has the current government responded quickly to the economic and social crisis?

François Faure:

It has, by launching emergency measures to counter the financial shock waves. It began with a plan to reduce debt servicing charges, which are very heavy. This includes measures to extend the repayment of very short-term local debt held by resident investors in 2019-2020. The government will then present a debt restructuring proposal, which is mandatory under Argentine law, to investors, mainly local residents.

The government has also contacted investors, notably non-resident investors, to restructure its international bonds.

Lastly, the government will approach the IMF to delay repayment of its loans with the international institution.

We’ve covered the debt situation. Meanwhile, the foreign exchange situation continues to deteriorate, notably due to the decline in foreign reserves triggered by capital flight, as well as by the dollarization of deposits. The government has responded by reintroducing and tightening foreign exchange controls.

François Doux:

To conclude, although we cannot predict the election’s results, Mr. Macri’s chances of getting re-elected are small. What are the main challenges facing the next government?

François Faure:

For the next government, the big challenge will be to choose between a potentially explosive economic and social situation, aggravated by high inflation, as we have already mentioned, but also by a 10% decline in social welfare benefits in real terms. People are suffering. At the same time, it will need to control inflation and stabilise the exchange rate in order to stabilise the debt, 80% of which is denominated in foreign currencies.

One would hope that Argentina could restructure its debt without defaulting. For the government, the big pitfall is to avoid setting unreasonable monetary policy targets, notably in terms of inflation. All of this would help boost its monetary policy credibility and stabilise the currency.

Of course, the IMF risks demanding greater fiscal efforts simply to stabilise the debt. This would make things extremely tricky for the government.

François Doux:

That gives us a lot of things for which to watch out.

Thank you, François Faure, for this update on Argentina’s economy.

Tune in next month for a new edition of EcoTV.

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