Confidence in Argentina’s economy is evaporating as the government grapples with political infighting, an ever-growing pile of domestic debt and inflation hurtling toward 90 percent.
The US dollar has hit new highs in the black market as Argentines limited themselves to buying $200 a month and rushed to money changers to dump their rapidly devaluing pesos. On Friday, dollars were sold on the streets of Buenos Aires for 337 pesos, a 15 percent increase in just one week.
The rapid deterioration in sentiment and the government’s growing difficulty in self-financing is raising fears of a full-blown economic crisis similar to the one that has periodically plagued the South American grain exporter for the past half century.
“The risk of accelerating the pace at which Argentina’s economy is deteriorating is significant,” Citi warned this month.
The difference between the black-market dollar and the artificially controlled official rate has widened to more than 150 percent — a level last seen during Argentina’s 1989-1990 hyperinflation, according to broker Portfolio Personal Inversiones.
Argentina has been largely cut off from international debt markets since its bankruptcy in 2020. Instead, the government finances itself through money printing and domestic debt, most of which is inflation-linked and has increasingly higher interest rates.
President Alberto Fernández rules out a one-off devaluation. Still, many Argentines and banking economists fear that the economy will get a lot worse before it gets better.
“Selling dollars is crazier than ever,” Adán, 28, who illegally exchanges money in downtown Buenos Aires, so prefers not to give his full name, told the Financial Times. “The only thing customers don’t want to hold onto is pesos. . . many are asking questions about what will happen next.”
The abrupt resignation of Economy Minister Martín Guzmán on July 2 followed months of bickering within the ruling Peronist coalition. It raised concerns about the ability of Fernández’s weak and unpopular government to cope with the rapidly deteriorating situation.
“I decided to make a big purchase that I had put off because I knew the markets would go crazy if the minister resigned,” said Paige Nichols, a 35-year-old marketing consultant, while shopping in Buenos Aires.
Guzmán left just three months after negotiating a $44 billion debt restructuring deal with the IMF. But his promises to contain the budget deficit have been fiercely opposed by powerful vice president Cristina Fernández de Kirchner and her radical allies. Kirchner believes the Peronists should instead spend more to protect voters from soaring inflation ahead of the 2023 presidential race.
Despite Guzmán’s early departure, IMF officials believe the economic targets the fund has agreed with Argentina can still be met by his successor, Silvina Batakis, if she acts quickly.
Kristalina Georgieva, the director of the IMF, said Batakis understood “the purpose of fiscal discipline” and described a “very good” first meeting with the minister.
But events threaten to overtake Batakis, a little-known figure who few believe has the political power to implement the cuts in energy subsidies and cuts in money printing that had eluded her predecessor. “No measure will be effective until it becomes clear that Vice President Cristina and her group will not sabotage Batakis,” political risk group Eurasia said in a note.
Inflation, meanwhile, reached 64 percent a year in June and is expected to rise above 90 percent by the end of the year, according to Morgan Stanley.
Despite high commodity prices on the world market, Argentina’s net foreign exchange reserves fluctuate at just $2.4 billion. Costly energy imports are partly to blame, but the country’s grain exporters are also hoarding their crops for fear of impending devaluation, rather than shipping and paying in pesos at the unfavorable official rate.
Argentina’s public debt to private creditors, which was only restructured in 2020, is being traded back in distressed territory. And according to a survey by the central bank, the country is expected to enter a short-term recession this year, with contraction in the second and third quarters.
Ignacio Labaqui, senior analyst at Medley Global Advisors in Buenos Aires, said economic factors were only part of the problem. “Even if the government announced a coherent economic plan, Fernández lacks credibility,” he said. The ruling coalition has failed to reassure the public: “It’s a matter of when they devalue, not.”
Two pillars of the IMF deal are reducing the budget deficit in three years and cutting back the central bank’s printing of money to fund it. Buenos Aires agreed to these stricter terms in exchange for a grace period of 4 and a half years on IMF payments, with full repayment by 2034.
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Argentina is limited to printing 765 billion pesos ($5.8 billion) for the full year to finance its deficit. But the central bank has already printed 630 billion pesos this year, more than half of that in the past month and a half.
In an effort to encourage investors to buy treasury bills, Argentina’s central bank last week promised investors that if prices fell, the bank would protect the investment. Analysts said this could lead the bank to press even more pesos to support the new guarantee.
An estimated 900 billion pesos ($6.8 billion) in local currency debt will rise in September alone. Confidence in the government’s ability to roll over this loan is waning amid concerns over its ability to pay and a possible impending devaluation, despite official denials.
It also seems difficult to reduce the budget deficit before interest payments from 3 percent of GDP last year to 2.5 percent in 2022, as set out in the IMF agreement. According to Julian Rojo, an analyst at General Mosconi, a local think tank, energy subsidies, one of the main reasons for the red ink, have nearly doubled in the 12 months to June.
On top of the deteriorating economy comes Argentina’s rambunctious politics in the run-up to next year’s elections, which the Peronists are likely to lose. “The risk of a government crisis is not negligible in Argentina, given the ongoing economic crisis. The government’s ability to complete the current presidential term is a concern,” Labaqui said.
Additional reporting by Isobel McGrigor in Buenos Aires