Pantheon Macroeconomics

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5th Sep 2018 15:25News

Q: Can Macri or the central bank actually do anything to stop the peso freefalling?

A: I think Macri’s government has done everything it can to stop the financial crisis. It has recommitted to maintain tight monetary policy; it has implemented a tougher and faster fiscal consolidation, and has tapped funding from the IMF. Overall, it has implemented all the macroeconomic policy measures available to stop the pain. Front loading of IMF resources is a solid step in the right direction. The IMF's help reduces Argentina's external financing risks, while the state of the country's external accounts are better, and it has full support from the IMF, something unthinkable under Ms. Kirchner's regime. Markets' trust in Mr. Macri's willingness and capacity to implement the badly-needed structural reforms diminished in recent months, but the recent moves, including substantial interest rates hikes, ambitious fiscal targets and the elimination of the BCRA financing of the Treasury, are welcome and should restore markets' confidence and stop the ARS from freefalling.

Note that President Macri inherited a badly battered economy, following years of populist policies under the previous administration. High inflation, mounting fiscal deficits, and external accounts under severe stress all had to be addressed. So it takes some time to implement the necessary adjustments. The ongoing economic recession will help to bring inflation down and improve Argentina’s external accounts. But it will bring some political and social costs. This is crisis of confidence and nobody knows how long will take to see a real improvement. Moreover, emerging economies broadly are under severe pressure, and global conditions are more challenging. We have an ongoing trade war and the U.S. is increasing interest rates. Under these circumstances, countries with macroeconomic imbalances, like Argentina, will continue to face volatility. 

This year and next will be extremely difficult for the economy and Macri's government. The recent currency sell-off, the need for a bolder fiscal consolidation, Brazil's sluggish economic recovery, and the current tough environment for EM, all suggest that the currency and the government will remain under stress over the coming year. All these factors bode ill for Mr. Macri's re-election hopes next year. The election will be another source of volatility if the economy fails to rebound.

Andres Abadia, Senior International Economist

Pantheon Macroeconomics

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Keywords for: Question of the Week, WC 3rd September