As I write these lines, the scenario in Argentina appears to be changing on a daily basis and it is still early to draw any definitive conclusions on the impact of the current crisis, both on the economy and Argentine financial assets. However, I believe it is highly probable Argentina will pass the stress test in economic terms, albeit at a high political cost, and very much depending on the international scene.
Macri’s strategy of gradualism has been strongly criticized since the beginning of his administration in 2015 and macroeconomic balance in Argentina has been fragile and subject to the ups and downs of the international market, which favored the country until very recently. The truth is, all along we knew the current account deficit has been too high, the fiscal deficit should have gone down faster, inflation should have dropped further, external debt has been rising at a very fast pace, etc. Thus, many analysts have criticized the government and have wisely suggested a higher interest rate in order to combat inflation, a more drastic reduction of fiscal expenditures, deeper reforms, a weaker exchange rate to balance external accounts, etc.
I wonder, what would have been the alternative to gradualism? I do not believe fiscal and monetary radicalism, with which Argentines also have experience, would have yielded better results. Obviously there are trade-offs in economic management. I am not trying to defend Macri, as mistakes have clearly been made, some that could have been prevented, but you cannot simultaneously have it all while attempting to normalize the economy after decades of mismanagement. Frankly, despite all of Argentina’s economic problems, the balance between risk and return for Argentine financial assets has been very attractive thus far and could continue to be so with announced changes.
The trade-offs will remain the same: there is no investment without capital imports, no fiscal adjustment without regulated price increases, no extremely high interest rates without the risk of an overvalued exchange rate, etc. Achieving a balance between fiscal, monetary, external and activity is no small feat to begin with, let alone in Argentina and even less so when considering the overall political context. Macri opted for gradualism as an economic strategy, subject to the scenario and risks of the political plan.
As analysts we are now getting what we wanted, and once the dust settles we will find a country with a steeper depreciation of its exchange rate, with a very high interest rate, more ambitious fiscal targets and with the credit and conditionality under the IMF program as insurance. From a market perspective, this could translate to a country that has primarily strengthened and is thus more attractive, albeit with potentially relevant political and economic costs in terms of growth and inflation.