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Argentine Peso Slump Shows Country Heading for Recession

Argentine Peso Slump Shows Country Heading for Recession
(Dollar Photo Club)

Friday, 14 September 2018 02:06 PM

Fifty years of currency crises from Chile to Indonesia signal a bleak outlook for Argentina and President Mauricio Macri -- a deep recession followed by political upheaval.

Countries that have seen their currency decline by more than 40 percent in a year have typically suffered economic contractions of more than 6 percent the year after. Argentina’s peso is down 53 percent in the past 12 months.

As Argentina’s government struggles to restore investor confidence, foreign financing has dried up and borrowing costs have soared, stalling investment and undercutting what was already a fragile economy. The only question is how big the recession will be. Moody’s is forecasting a 2 percent decline in each of the next two years, while Fitch Ratings sees a 2.5 percent recession this year, with further contractions possible.

“The currency selloff has already had a big negative impact on confidence,” said Todd Martinez, an analyst at Fitch in New York. “It means higher inflation going forward, which erodes real wages and pensions and will weigh on consumption.”

The slump has already started. Industrial output plummeted 5.7 percent in July from the year earlier, after dropping 8.1 percent the month before.

Political Consequences

Brutal recessions have inevitable political consequences. Chile’s 1982 crisis spelled the beginning of the end for the dictator Augusto Pinochet, Mexico’s 1994 crisis loosened the Institutional Revolutionary Party’s grip on power and Indonesia’s collapse of 1997 led to the downfall of President Suharto a year later.

Closer to home, protests in Argentina in 2001 forced President Fernando De la Rua to flee the presidential palace in a helicopter. President Macri faces elections next year.

Yet, the recession is unlikely to be as deep this time round as the 2002 crisis, when Argentina defaulted on its debt, banks collapsed and gross domestic product contracted 10.8 percent. For one, much of the dollar-denominated corporate debt in Argentina was issued by companies with significant earnings in greenbacks.

“The positive element in this compared to other past currency crises is that there’s not a high degree of mismatch in terms of credit to the private sector,” Martinez said in an interview. “This is a currency crisis that doesn’t show signs of contaminating the financial sector.”

Policy Response

Sergi Lanau, deputy chief economist at the Institute of International Finance, even thinks Argentina could pull itself out of recession as early as next year after agreeing a $50 billion credit line with the International Monetary Fund.

“This crisis is very different because in 2002 Argentina had a fixed exchange rate and a very difficult relationship with the IMF,” Lanau said. “Now, there isn’t the same kind of risk.”

How quickly Argentina recovers will depend on Macri’s policy response. Steep spending cuts now will push the economy deeper into recession, but may also restore investor confidence more quickly, enabling private investment to flow back into the economy.

Yet, with an election looming at the end of next year, steep fiscal cuts may not be politically palatable. Students protesting over university budget cuts closed off the main boulevard in Buenos Aires Wednesday, while striking truckers closed off access to a key grain port in northern Argentina Monday.

“There are doubts that the government will have the capacity to implement an adjustment in an election year,” Lanau said in an interview in Mexico City. “Political risk has increased, and they’ve had to take difficult measures that weren’t originally anticipated.”

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Fifty years of currency crises from Chile to Indonesia signal a bleak outlook for Argentina and President Mauricio Macri -- a deep recession followed by political upheaval.
argentine, peso, country, recession
Friday, 14 September 2018 02:06 PM
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