Argentina falling deeper into crisis?

Summary

The resignation of economy minister Martin Guzman has the potential to upend Argentina's long-term economic recovery. Guzman, an investor-friendly reformist, was committed to fulfilling Argentina's commitments under the new IMF plan and bringing longer-term stability to Argentina's economy. His successor, Silvina Batakis, a former economy minister aligned with Cristina Kirchner, is more of an unknown to the investor community; however, her alignment with Kirchner makes us nervous that she could boost fiscal spending and disregard the IMF program. With limited policy levers and insufficient foreign exchange reserve buffers, as well as sentiment toward Argentina worsening, another large peso devaluation could be looming. Going forward, we will be mindful of the policy priorities set by Batakis and how progress toward the IMF's objectives is evolving. Any deviations from achieving fiscal balance and other reform items could see pressure build on the peso to the point where a 10%-15% devaluation is needed to avoid another full-blown crisis.

Guzman's Resignation Clouds Argentina's Recovery

There is an old saying in economist circles. It goes something like this: "Throughout history there have been only four types of countries. The developed, the underdeveloped, Japan and Argentina." Credit former economist and winner of the Nobel prize in economics Simon Kuznets for these words of wisdom. According to Kuznets, his quote relates to the diverging economic histories between Japan and Argentina. Said another way, Kuznets was referring to the long-term economic successes of Japan and economic failures in Argentina. As a quick history lesson, in the early 1900's, Japan's economy was underdeveloped and wealth levels across the nation were relatively low. Over the last century, Japan has industrialized, invested, and increased productivity enough to become the third largest economy in the world. On the other hand, at the turn of the 20th century, Argentina was one of the wealthiest and fastest growing nations in the world. However, since the mid-1900's, those fortunes have reversed course amid a broad shift to interventionist, protectionist and nationalist policies. Rather than a leading economy the country once was, Argentina has become labeled a serial sovereign debt defaulter and is plagued by one of the highest rates of inflation in the world. In many ways, Japan is the "rags to riches" story, while Argentina is the "fall from grace" cautionary tale.

Kuznets made this comment decades ago but, in part, his quote lives on today. While Japan's economy has stagnated in recent years, Argentina's has continued to find new depths. In 2020, the government defaulted on its debt for a historic ninth time. Just recently, in an effort to avoid a tenth sovereign default, the Alberto Fernandez administration took on a US$44B bailout program from the International Monetary Fund (IMF). And finally, the political concerns that frequently plunges Argentina's economy into recession persists today. In fact, political risk has flared up again over the last few days. To that point, economy minister Martin Guzman, who negotiated a debt restructure with bondholders after the government's latest default and worked with the IMF to secure a new program, resigned over this past weekend. Guzman's resignation letter cites persistent infighting within the current administration and a lack of political backing as his primary reasons for leaving. According to Guzman, his lack of centralized control of macroeconomic policy instruments left him somewhat powerless to turn Argentina's economy around. Markets viewed Guzman positively for being a reformist dedicated to placing Argentina on a more sustainable path to recovery. While inflation topped 60% year-over-year under Guzman and the economy is likely headed toward recession again, market participants still felt he was a credible policymaker operating with a long-term vision of fiscal balance and lower inflation.

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