The Argentine peso has depreciated to the extent that one US dollar is now over twice the price it was one year ago (see left chart below). In a deep recession since early 2018, the country’s economy shrank by 2.5 per cent in 2018, with expectations for 2019 now standing at -1 per cent at best.
Despite a slight improvement in March 2019, our proprietary growth indicator has consistently been negative, leading the longer-term average into negative territory (see right chart).
Argentina's currency and economy going down, hand in hand
Fig.1a (left) - Exchange rate: Argentina peso versus the US dollar / Fig.1b (right) - Pictet leading index growth (3m/3m annualised)
Source: Pictet Asset Management, CEIC, Datastream, April 2019
... authorities in disarray are struggling to cure
Stabilising inflation was one of President Macri’s top priorities when he took office at the end of 2015. But the measures taken so far have failed, annual inflation is now around 55 per cent. Monthly inflation numbers have also reached high levels. Transportation costs for instance rose by 5 per cent in March. A number of policies have been introduced and modified, as the government has hesitated over whether to give priority to purchasing power by subsidising the cost of utilities for consumers or not (see chart below).
CPI as a reflection of the government's doubts
Fig.2 - CPI: housing, water, electricity, transport and health
Source: Pictet Asset Management, CEIC, Datastream, April 2019
In a last attempt to resolve the situation ahead of October elections, the government has announced a new set of measures aiming to improve purchasing power:
Price controls on 60 basic products, including food, for at least 6 months
This is likely to create a shortage of those goods and potentially the creation of a secondary market.
Increase of utilities’ prices put on hold
This means shifting the burden back from consumers to an already cash-strapped state.
Introduction of subsidised credit lines for households
These measures follow the Central Bank’s move to restrict money expansion and to actively intervene within the currency fluctuation range introduced last year. Interest rates currently over 65 percent should remain high at least until the summer.
What next?
Can currency depreciation be contained?
Even if we think the measures are going in the right direction, anything is possible.
The fact that the majority of Argentine households’ savings are already in US dollar mitigates the risks of further domestic pressure on the currency.
The problem is that despite having good intentions, the Central Bank and the Government have so far reacted in panic and long-term investors have lost confidence.
Upcoming elections in Q4 2019
Pressure on the Macri government has been mounting, especially since the beginning of the year. The Argentines have seen their purchasing power squeezed by inflation and austerity measures. In addition, the presidential election later in the year does not leave much time for the economic situation to improve.
We will find out in June whether Macri and his rival, left-leaning and former president Christina Kirchner, will be candidates.
To conclude, key to watch will be the outcome of the October elections. Macri's fate hinges on his government's capacity to stabilise the currency and bring down inflation. For now, his popularity is dropping to the benefit of former president Cristina Kirchner. But given her track record as president, her candidacy creates concerns for domestic and foreign investors. We fear that she could renege on debts or on the IMF package should she return to power.
Anjeza Kadilli joined Pictet in 2015. She is an Economist in Pictet Asset Management’s Economic Analysis team where she conducts macroeconomic analysis of emerging markets. Anjeza holds a PhD in Econometrics from the University of Geneva - where she also obtained an MSc and BSc in Economics. During her PhD, Anjeza spent time at the University of Southern California, Riksbank and HEC Montreal as a visiting scholar.
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