Why always Argentina?
Argentina’s president unveiled a sweeping new austerity programme to win over international investors and bailout lenders, admitting the country faced an “emergency” in the wake of market panic after the peso’s collapse. In an impassioned address to the nation from the presidential palace on Monday, Mauricio Macri said his government needed to act quickly to restore investor confidence following his request last week for an accelerated $50bn IMF rescue package.
“We believed with excessive optimism that we could go along fixing things bit by bit. But reality shows us that we have to move faster,” Mr Macri said. “The world has told us that we are living beyond our means.” The country has been lashed by a global storm in emerging markets since the peso plunged last week to it lowest level against the dollar, taking its depreciation this year to more than 50 per cent.
Argentina has helped spark the broader rout in developing world markets, but has also been one of its biggest victims, forcing the government and companies to scramble to find ways to pay off billions in dollar-denominated debt. Argentina seeks help after peso collapse Emerging market stock indices fell for a fourth straight day on Monday.
JPMorgan’s emerging market currency index gave up even Friday’s modest bounce to trade at a fresh record low. The Turkish lira has been the other currency to suffer most from the sell-off. It forced the central bank on Monday to signal that it was prepared to raise interest rates next week to head off spiralling inflation triggered by the lira’s plunge. This is an emergency and we need your help Mauricio Macri Data released on Monday showed Turkey’s consumer prices had increased by an annual rate of 17.9 per cent in August.
The central bank — which has stubbornly refused to raise rates in recent weeks amid denunciations of higher rates by President Recep Tayyip Erdogan — issued a statement acknowledging its “monetary stance will be adjusted”. The reformist Mr Macri has moved more aggressively to assuage investors, and Argentina’s central bank has already raised its main interest rate to 60 per cent. Nicolás Dujovne, economy minister, signalled he would quickly try to tighten control of spending. He said the government would eliminate its primary fiscal deficit next year — the gap between spending and income, before taking debt servicing into account.
Buenos Aires will raise taxes and slash its bureaucracy to try to hit the target, which is much more aggressive than a previous plan to lower the deficit to 1.3 per cent next year. The fiscal deficit was 3.9 per cent in 2017, while the target for this year is 2.7 per cent. But underscoring how severely investor sentiment towards Ankara and Buenos Aires has soured, both country’s currencies fell further on Monday despite the announcements.
The peso fell another 4.3 per cent against the dollar to trade back near the record lows that were touched last week. Argentina’s elimination of the fiscal deficit will, in part, be financed by increasing export taxes. Mr Macri said the country needed help from “those who have most capacity to contribute”. Taxes on exports have been highly contentious for the powerful farming sector and Mr Macri had promised this year to continue to reduce taxes on exports of soya.
But he said on Monday the crisis was forcing him to implement measures he would prefer to avoid. “We know that it is a bad tax and it goes against what we want to encourage, but this is an emergency and we need your help,” he said. He attributed many of the problems to external factors, including rising US interest rates and oil prices, the US-China trade war, problems in Turkey and Brazil, and the worst drought in almost half a century.
Recommended Analysis Americas politics & policy Argentine currency crisis spreads to politics Mr Macri also announced that he would cut the number of ministries by more than half, folding more than 10 ministries into others and in effect demoting more than half of his ministers. He described the currency crisis, which erupted in late April, as “the worst five months of my life” since he was kidnapped 27 years ago. Mr Macri said last week he would ask the IMF to speed up disbursement of a planned $50bn support programme to try to protect finances.
Investors have been looking for the government to ditch its policy of “gradualism” in reducing its spending, and many analysts said they welcomed the promise to eliminate the primary budget deficit by next year. “This is the only way they will arrest this crisis,” Federico Kaune, head of emerging market debt at UBS Asset Management, said ahead of Mr Dujovne’s announcement.
“They need to show that the strategy has changed from gradualism to a more orthodox fiscal tightening.” However, fund managers say that, after mis-steps and a worsening crisis that has burnt many investors who kept faith with the government, markets will need to see tangible evidence and hard commitments before they dip back in.