Economic and Political Crisis in Argentina

• The International Monetary Fund (IMF) agreed a $50bn financing deal for Argentina with specific ‘strings attached’ on 07 June.
• President Macri has been unable to provide economic stability in Argentina after years of economic mismanagement.
• Civil unrest has occurred frequently in Argentina, while a strike by truck drivers and anti-austerity protests are due to occur on 14 June 2018.

Political: On 07 June 2018, the International Monetary Fund (IMF) has agreed to a $50bn loan agreement with Argentina (subject to agreement by the IMF board on 20 June). Argentina had requested assistance from the IMF, known as the lender of last resort, on 08 May after the Argentine peso dropped dramatically when international investors withdrew investment from global emerging markets.

At present, interest rates in Argentina are at 40 per cent (the highest in the world) and inflation is in the double-digits, at around 25-28 per cent. As part of the package, Macri’s government has agreed to accelerate the reduction of the fiscal deficit (to 1.3 per cent of gross domestic product in 2019, down from 2.2 per cent previously), halt currency manipulation/intervention, provide legislation to give full independence to the central bank, and to end the funding of the government budget shortfall through money-printing. The loan from the IMF will come in instalments. $15bn is expected to be disbursed on or around 20 June should the IMF board ratify the loan, with an interest rate of between 1.96 and 4.96 per cent depending on the final loan amount. After 20 June, it will be at the discretion of the Argentine government as to how much of the $50bn credit line from the IMF that it actually uses. The deal also allows for a three-year grace period, after which Argentina will be required to pay back any money borrowed in eight quarterly instalments.

Going to the International Monetary Fund is almost certain to have a political cost for the government and may represent a double-edged sword. Opposition politicians have already lambasted the planned deal; Macri will be forced to inflict further punishing austerity measures onto the population. Many in Argentina bear a grudge against the IMF as a rescue deal at the turn of millennium failed, forcing the country into an $82bn default in 2001. Tens of thousands of members of social, labour, and political organisations took to the streets of Buenos Aires on 01 June in opposition to the ongoing talks between the IMF and the government. It is of note, however, the IMF believes that this loan arrangement is more likely to be successful than the 2001 deal as the economy is presently in a stronger position this time around. Martín Sabbatella, a politician close to the firebrand former populist president Cristina Fernández de Kirchner, has criticised the government for “mortgaging the future of our children and grandchildren.” Furthermore, a strike for 14 June has already been announced by Central de Trabajadores de la Argentina (CTA) and the Central de Trabajadores de la Argentina Autónoma (CTA Autónoma) unions. A joint announcement made by the groups accuse the government of handing national sovereignty over to the IMF. The two groups intend to join a planned strike conducted by the truckers’ union, whose members are demanding a 27 per cent pay rise. Protests are expected across the country when all strikes occur, with truck drivers expected to block roads in a similar manner to current strikes in Brazil. The strike and protests by Brazilian truck drivers led to nationwide shortages of essential goods including foodstuffs, medicines, and fuel, almost bringing the economy to a standstill over the course of ten days. If the Argentine strikes are as widespread, similar effects are highly likely.

Many commentators have been surprised by the efficiency with which the deal was made between the government and the IMF, suggesting its urgency, while also providing a sign of international confidence in Macri. The deal was expected to take six weeks to negotiate but only took four and amounted to $20bn more than was expected. This deal provides a stable source of credit not available in the private sector, the volatility of which contributed heavily to Argentina’s current predicament. The “strings-attached” by the deal supports President Macri platform, with many of the preconditions in line with the government’s planned reforms. Macri may be able to save face (especially in response to union criticism), with the IMF reporting the deal as being “owned and designed by the Argentine government”, rather than the country being dictated to by a foreign entity. This may bolster support for the government in preparation for elections in 2019, desperately needed with governmental approval ratings currently sitting at around 40 per cent, their lowest since the 2015 elections. Macri faces an uphill battle to change the minds of the populous with whom the IMF is not popular. A recent poll found that 75 per cent of Argentines were opposed to any deal with the IMF, although a change in material and economic circumstances as a result of the deal may neutralise this.

In the longer-term, Argentina needs real, substantive, and possibly painful reforms to overcome the constant need for outside support servicing its debt and fuelling its economy. The IMF loan is a short-term measure, not a cure; Argentina and Macri can expect tough times ahead.

An unsuccessful deal with the IMF may allow for populism to rise in the country and have a negative impact on regional and global stability. Populists currently head governments in Italy, Turkey, the Philippines, the United States, and elsewhere, while leading in polls in Brazil and Mexico as these two countries prepare for 2018 elections. The negative ramifications of populism are already being felt across the globe. Moreover, commentators have discussed fears that debt crises in countries like Argentina and Turkey may represent a warning sign, perhaps signalling the end of years of economic growth and a new economic crisis. While the IMF may be able to support the first wave of debt crises it is unclear what support they would be able to provide to the second-wave, knock-on debt challenges. However, provided that global interest rates remain at historic lows, defaults or IMF bailouts should be able to be avoided; this may change in the medium- to longer-term.