With Groundwork for Reform in Place, Argentina Needs Leadership to Stabilize
By Sean Goforth, on
Since October, when President Cristina Fernandez de Kirchner had surgery to remove a blood clot in her head, Argentina has been on tenterhooks as people worried about the president’s future, who might be secretly running the country in her stead and mounting evidence that the country is once again headed toward economic collapse. In the most alarming sign of what the future may hold, police officers in Cordoba province went on strike in December to protest their low pay. With no one walking the beat, impromptu gangs formed. Riots then erupted across the country, including in the outskirts of Buenos Aires. In all, more than 1,000 stores were looted, and as a result, many store owners simply refused to open for business.
Before the riots flagged, a heat wave led to overloaded power grids, subjecting many residents of Buenos Aires and other cities to a prolonged blackout. Utility companies have avoided maintenance of power lines because of low electricity rates mandated by the government in one of its efforts to offset high inflation.
As the riots and power outages persisted, more people began blaming the government. “Where was the president?” one shop owner asked a Bloomberg reporter during the riots.
Finally, last Wednesday, in her first public appearance in five weeks, Fernandez held a brief press conference, but only to announce a new student loan program.
Her return coincided with a scaling-back of efforts by Argentina’s central bank to support the peso at an exchange rate of around 6.9 pesos per dollar. As the peso’s value fell, dropping 15 percent in two days, many stores updated their prices in real time to reflect the currency’s withering value. At one major electronics retailer, for instance, the price of one smartphone rose from 7,990 pesos to more than 11,500 pesos in the course of six hours. Other stores are simply stockpiling newly arrived merchandise while waiting for the peso to stabilize.
Initially, the central bank intervened in the currency market by spending $100 million from its dollar reserves to bolster the peso. But Friday, with the peso still under pressure, the central bank announced it would no longer restrict access to dollars. Instead, this week the government will abolish what’s become known as the “clamp,” a practice officially denied but nonetheless used to prevent Argentines from legally buying dollars since 2011.
News of the peso’s tumble sent stock markets around the world immediately lower, with the Dow Jones dropping more than 300 points. On Argentina’s thriving black market, where many in the country glean an idea of the currency’s fair value, a dollar cost between 12 and 13 pesos over the weekend, a rate almost 50 percent lower than the government’s official exchange a week ago. The peso’s value is likely to decrease further.
Both in Argentina and abroad, the devaluation has fueled wider fears. Few foreign investors are directly exposed to Argentina’s woes, chiefly because many publicly traded multinational companies hightailed it out of the country years ago when Fernandez’s administration took to seizing foreign companies. Rather, for investors the fear is that Argentina is an early indicator of an impending slowdown across emerging markets, including the likes of Brazil, Turkey and China.
Within Argentina, concern centers on inflation. Although inflation has been high throughout Fernandez’s presidency, for most of the past seven years the economy was also growing at a brisk pace, thanks to China’s seemingly insatiable demand for Argentine soybeans and iron ore. From 2007 to 2012, the erosion of the peso’s value amounted to a minor nuisance. Last year though, Argentina’s economy slowed to a crawl, yet inflation accelerated. In 2013, inflation topped out at nearly 30 percent by most estimates, roughly three times the rate claimed by the government.
Yet this weekend, Fernandez seemed aloof to the peso crash. Instead of outlining a plan for an orderly economic recovery, she jetted off to Cuba, arriving four days in advance of a regional summit she is scheduled to attend. Prior to leaving, she was at the Argentine presidential palace, the Casa Rosada, less than three days last week, leaving many to wonder what she plans to do about the economy and shoddy electrical grid.
“There’s no plan, she is out of touch with reality,” one Argentine told the Guardian after 40 days without electricity. “She’s like Alice in Wonderland.” With slight variation, “there’s no plan” has become the phrase of choice in conversation about Argentina over the past week.
Ominous as the situation now appears, Argentina does not need to endure more rioting, let alone undergo another economic collapse, in order to stage a rebound. In truth, much of the groundwork has already been laid for reform. Since 2012, Fernandez has moderated her populist rhetoric, even going so far as to try to make amends with aggrieved European investors. By one measure her efforts appear to be working: Argentina’s stock market is up more than 65 percent in the past year. Also, in recent days the hedge fund fighting a legal battle with Argentina over repayment of bonds has signaled its willingness to resolve the matter. “We could settle this thing in an afternoon,” Paul Singer of Elliott Management told the Wall Street Journal. Doing so would allow Argentina to sell bonds overseas for the first time since 2001.
And although the current peso crash in some ways harkens back to the hysteria of 2001, it should dispel fears of another default. By no longer pumping up the peso, the central bank will plug a major drain on the country’s dollar reserves, which just touched a seven-year low at $25 billion. Given the rate at which the central bank was hemorrhaging dollars, Argentina might have run out of reserves in two or three years, throwing the country back into default. Now that is less likely.
Argentina may not be in as tough a spot as many people think. But for stability to be restored in the long run, the president must be present.
Sean Goforth is an analyst at Wikistrat, a geostrategic consulting firm, and author of "Axis of Unity: Venezuela, Iran & the Threat to America" (Potomac Books, 2012).
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