Daily Management Review

Another Economic Debacle Heading Argentina’s Way?


Talks with the International Monetary Fund has bene initiated by Argentina for securing an emergency debt to tide over the rising inflation rates and a steadily falling currency – the peso.
The steady fall of its currency has resulted in increased inflation and soaring prices and it appears that the country is once again entering into a very volatile economic environment. The rate of interest was very recently hiked to 40% by the central bank in three rate hikes within a span of 8 days to control the falling peso. The 12-month inflation rate touched 25.4% which is well above the 15 percent target set by the central bank of Argentina. There has been a fall of 20% in the value of the peso against the dollar since the beginning of the year.
"Argentina is still a difficult country and unless they do reforms then it's going to be having issues," Michele Gesualdi, the chief investment officer at Kairos Investment Management, said in a television interview.
The economic problems of the country have been exacerbated by the lack of reforms, Gesualdi further said.
"There was a lot of excitement involving (President Mauricio) Macri, and frankly we were involved for example in the first two years. But then the risk reward wasn't very compelling in fixed income, it was a bit better in equities, but increasingly over the last few quarters Macri has been disappointing investors in terms of not doing the reforms he promised," Gesualdi said.
A reform agenda had brought Macri – who belongs to the center-right Republican Proposal, to power in 2015. But apparently, the economic problems handed over to him by his predecessor have been too tough to tackle and  hence he has had to look top the IMF for help.
"The IMF has a terrible reputation among Argentinians, and so this is a big political gamble for the government."-Fiona Mackie, Regional director for Latin America at the RIU
The decision to turn to the IMF by Argentina was described as a "positive step" by Graham Stock, an emerging markets senior sovereign strategist at BlueBay Asset Management.
"It is certainly a good thing … The central bank has faced challenges in managing the currency and in keeping inflation under control … and the Macri administration has been pursuing a very gradual approach to fiscal adjustment," Stock said.
However, approaching the IMF for help is a sensitive issue in Argentina.  A default on a $132 billion of foreign debt had ushered in a period of economic down turn in the country in 2001. The crisis in the country had bene prolonged by the efforts of the IMF to support the peso against the dollar, the Washington-based Fund had conceded a few days after that incident back then.
There were protests from multiple corners against a possible IMF intervention against after Macri announced the about the talks with the Fund. They were still concerned about the IMNF role during the 2001 economic collapse in Argentina.
"The IMF has a terrible reputation among Argentinians, and so this is a big political gamble for the government," Fiona Mackie, regional director for Latin America at the Economist Intelligence Unit, told the media.
"At present, though, (the government) clearly sees the need to regain the confidence of markets as more pressing, and is hoping that its program of adjustment gets back on track in time for the presidential election late next year," she added.
On the other hand, Argentina was described as a "valued member" of the Fund by the managing director of the IMF - Christine Lagarde. "Discussions have been initiated on how we can work together to strengthen the Argentine economy and these will be pursued in short order," she said.