After the election of Alberto Fernández as president of Argentina in October of last year, the economy went into a tailspin. The IMF expects Argentina’s economy to contract by 11.8% this year, the worst outcome in the country’s recent history (in 2002,  the previous annus horribilis in Argentina’s history, the economy fell by 10.9%). Clearly, the economy was already in decline when it became clear that Mauricio Macri, Alberto’s centrist predecessor and the financial markets’ preferred candidate, would lose the elections. Macri left the country with an unsustainable debt pile as he failed to rein in government expenditures quickly enough and foreign investors became impatient. Fernández sensibly opted to default on US$ 65 billion of (external) debt but negotiated a deal that, in our view, will be a prelude to another default within 3 years or so. Indeed, bond prices have declined from 50% in early August (close the supposed “value” of the deal of 55 cents/dollar, according to bankers) to 35% now, whereas credit default swaps are pricing in a 57% probability of default in 5 years time. Clearly, the pandemic hasn’t done Mr. Fernández any favours. The outbreak of the coronavirus forced the government to lock down the economy. Some key parts of the economy, notably the important tourism and shale oil & gas sectors, were severely hit. However, the Fernández government also made some unforced errors that will make life in Argentina extremely difficult in the coming years.

Mummy knows best…

Many businesses dialed back investments after the PASO, an otiose primary election for the presidency, substantially diminished Macri’s chances on re-election in August 2019 as they were wary to see that other Fernández, Cristina Fernández de Kirchner (widely known as CFK), Macri’s predecessor and now Alberto’s running mate as vice-president, making a comeback. Initially, business leaders were mildly optimistic that Alberto would be his own man and “not be crazy in government” (his own words). They pointed to his comparative business-friendliness when acting as chief of cabinet under CFK’s deceased husband from 2003 to 2008 but subsequent events poured cold water on this optimism. The debt restructuring talks were lengthy and poorly executed but at least materialized in an (too expensive, in our view) agreement. But the attempted nationalization of Vicentin, a soybean crushing business that drowned in more than US$ 1 billion of debt, was an early sign of the interventionist streak of this government. The take-over was aborted after a judge blocked government-appointed managers to Vicentin from acting as more than observers. Further, property rights may be infringed. In a response to private land occupations by homeless people on the outskirts of Buenos Aires suburbs, Alex Kiciloff, the governor of Buenos Aires province and CFK adept, said that the barrios privados, where the well-off live, also constitute illegal settlements. A farm, owned by the former minister of agriculture under Macri, was occupied with the apparent initial consent (later retracted) of Pope Francis, who has the insalubrious habit of interfering in Argentine politics. This is not exactly the best way to stimulate investments in the all-important agro sector: respecting landownership is sacrosanct in a country of farmers.

Meanwhile, inflation is in excess of 35%, fired up by extensive money printing, and is not higher only because tariff adjustments have been postponed and price freezes for several consumer goods have been implemented (which eventually will result in shortages on supermarkets’ shelves). The government’s exchange rate policy and capital controls (to stem capital outflows) have created an unsustainable situation whereby the official rate is 78 ARS/USD but the Blue rate is in excess of 180. A substantial devaluation is required to bring the currency at a balanced level but will come at the cost of higher inflation (which will hit the government’s voter base especially hard). The longer the government waits, the more harm is done to the economy as suppliers of goods have stopped delivering. The strict capital controls also imply a de-facto default by companies that have no access to dollars as, according to the law, they only can repay 40% of their maturities. Many companies, including BASF and Falabella, are fleeing the country. Danone is considering to follow suit. Others have indefinitely postponed inward investments.

The government still needs to reach agreement with the IMF over USD 45 billion of outstanding debt (with USD 4.9 billion due in 2021 and USD 18.3 billion due in 2022). Question is whether the IMF will insist on reining in expenditures, as would be required to achieve a sustainable debt trajectory (debt as % of GDP is nearing 100%). The government’s popularity is already sinking, so tense negotiations are to be expected and these will take time. The budget for next year pencils in a 4.5% primary deficit (IMF expects a primary deficit of 8.5% this year). No spending cuts are proposed (other than not settling debts with natural gas producers) but instead a wealth tax of 2.25% was imposed and a one-off “solidarity” tax is pondered, which, of course, only will result in increased emigration of Argentina’s brainy people to Punta del Este or elsewhere. Argentina is no country for old policies. Government expenditures should be cut drastically to the point that a primary surplus of at least 1% of GDP is achieved. Price freezes and subsidies should be abolished and replaced by an income support program targeted to the very poor. Tax legislation should be simplified and tax collection should be improved. Labour laws should be rewritten, making it easier and cheaper to let go employees, and the stranglehold that trade unions have over the economy should be broken down. SMEs should be encouraged to (re)enter the formal economy. The peso should be devalued, money printing should be stopped and capital controls should be lifted. Investments should be stimulated, for example by lifting foreign landownership restrictions.

Will the government abandon the old policies of CFK and instead reform the economy? Chances for this to happen, unfortunately, are very low. Alberto behaves like CFK’s puppy as a recently proposed judiciary reform law, that shields CFK from corruption charges and one that Alberto himself successfully opposed in 2013, shows. The Covid-19 pandemic will be used as an excuse for the poor economic performance and the IMF will give in to unrealistic projections, fearing to trigger the biggest loan default in its history. CFK wants to be remembered as the mother of the nation but if she doesn’t change track she risks ending up as lord of the flies instead…