Economic meltdowns are hardly impossible in Argentina. The country has gone through a total unravelling before — at the end of 2001, it had five different presidents in two weeks when it defaulted on $US132 billion of debt it could not pay.
So the question at hand right now is whether or not the economy is at that point again.
According to Federico Zaldua, a bond trader at Argentine fund, SP, we’re not at 2001 yet. But the year ahead promises pain for the entire country.
“Best case scenario — let the peso float freely after salaries renegotiation end and fix ASAP the inflation statistics in order to get international credit at a fair price,” said Zaldua, who manages $US50 million worth of Argentinean government bonds. “Worst case scenario: Inflation up up and up, USD up up and up, nasty recession followed by elections.”
Last week Argentina devalued its currency more than it has in 12 years, and the peso plunged 15%. Prices skyrocketed chaotically as the government placed the official official peso to dollar rate at 8 to 1, while the black market rate hit 13 pesos to the dollar.
“I would expect very choppy bond yields during the next few weeks,” said Zaldua. “Argentina already yields a lot for a country with a very low net debt to GDP ratio. The Government has opened a window to access the dollar but this window will not be very wide at least at 8 pesos per USD. We shall face an unstable market for a prolonged period of time. There is a sense the government does not have a clear plan.”
The plan, according to Zaldua, should include measures to deregulate and normalize the country’s currency market, negotiate with Argentina’s creditors — like The Paris Club, with whom country entered into negotiations to pay off its $US6.5 billion debt earlier this month — and curb inflation.
“They know they need access to international capital markets and they know they have to do something. But their agenda does not look very clear,” he said. “They will end up deregulating the currency market somewhat and approaching the Paris Club, Repsol (I expect a solution to this problem soon) and the IMF but they are afraid of inflation (salaries are being renegotiated soon) so I wouldn’t expect a free currency market in the short term. Status quo is not an option any longer.”
On the currency market front, measures to ease restrictions on dollar-buying announced on Monday are hardly a revolution.
It used to be that Argentines could only apply to buy dollars if they were leaving the country for vacation, and even then the government would determine how much they could get.
Now Argentines making $US900 a month or more can buy dollars, but the amount they can buy is tied to their salary. Either way, the maximum amount is $US2,000.
Moreover, unless they want to pay 20% tax, Argentines have to keep those dollars in the bank for a year — they can’t touch that money. This is meant to keep capital from leaving the country, as Argentina’s Central Bank had about $US30 billion in foreign currency reserves at the end of 2013.
The timing of this economic chaos has coincided with odd times for Argentina’s Presidency. At the end of last year, Cristina Fernandez underwent brain surgery. Until last week, she hadn’t spoken in public for 40 days. Right now she’s in Cuba for a conference leaving Cabinet Chief Jorge Capitanich and Economic Minister Hernan Lorenzino to handle the situation.
“Kirchnerismo is over for good one way or the other,” said Zaldua.
He believes the next President will be far more business friendly, and according to a recent poll conducted by U.S. Investment Firm Graham Fisher and Argentine polling firm PoliarquíaConsultores, 34% of Argentines think their international image would improve if Kirchner were gone.
According to the same poll, inflation is one of the top three concerns shared by Argentines, along with crime and the economy at large.
“Inflation is destroying Cristina’s popularity among all sectors but a very circumscribed sector,” he said.
Even before the government devalued the peso, independent statisticians put the country’s inflation rate at 25%. The government came under fire from the IMF and other international bodies for denying that inflation had reached this level, and publishing its own, lower numbers.
“…inflation statistics are the way they are because they are stubborn. There is NO rational explanation,” said Zaldua. “At this point, telling the truth is all upside politically and economically. Argentina has the lowest debt to GDP ratio in its history, we have been going through a huge commodities boom so all the current problems are self induced.”
But at least the government is changing course (whatever that course may be). As leaders try to get the house in order, though, Zaldua sees peso rates going up 25% and inflation reaching 30%, but it’s nothing Argentines can’t handle.
They’ve seen panic mode before, and unless the government completely loses control, this isn’t it. It’s just a very dangerous time.
“If you look beyond 2015, the outlook does not look grim. My sensation is, ‘finally the government is seeing that something needs to be done,'” said Zaldua. “Yes its dangerous because if they do not set expectations right, inflation will be much higher and a recession may occur with a political crisis that may end up Cristina’s government before its time comes due.”
That’s a pretty big “if.”