May 5, 2020
by Gustavo Ludmer, Ph.D in economic development and post-doc at CONICET.
The pandemic is causing a worldwide economic crisis that can only be compared to the Great Depression of the 1930s.
The International Monetary Fund (IMF) has projected that the planet's economy will contract by 3 % in 2020, so three times more than the decline of the 2009 subprime crisis. The agency predicts a GDB shrink of 7.5 % for the euro zone, 5.9 % for the United States, 5.3 % for Brazil and 4.5 % to 7.5 % for Argentina, a number that would represent the highest decrease since 2002 for this last country. Yet, this crisis, linked to the pandemic, is arriving at a precarious time for Argentina, while it is trying to renegotiate its foreign debt again.
At the end of December 2019, a new Perónist government came to power, with Alberto Fernández as president and Cristina Fernández de Kirchner (the former president from 2007 to 2015) as vice-president. The situation is difficult. The economy of Argentina is in a bad crisis of balance of payments since April 2018 because of the depletion of the financial accumulation model put in place by Mauricio Macri (2015-2019), which relied on the country's indebtedness on foreign markets. Between March 2018 and February 2020, the GDB contracted by 7.5 % and the price of the US dollar went from 20 Argentine pesos to 64, so an increase of 220 % in less than 2 years. In June 2018, Macri received a historic loan of more than 50 billion dollars from the IMF in exchange for a vast fiscal adjustment program. This was suspended in August 2019 due to the exodus of Argentine capital overseas. A moratorium of foreign-debt payments was also declared.
The incoming government was elected to control this economic crisis et renegotiate the foreign debt, too heavy to make an economic recovery possible. At the end of April, the Minister of Economy presented a reorganization proposal to the creditors and did not pay the interest in dollars on the deadline, thus provoking a power struggle which will culminate on May 22. The creditors have stated that the government's offer is insufficient, while the Argentine government contends that it is the only alternative to be able to eventually pay the debt. Even if both parties seem entrenched in their positions, it is time to negotiate behind the scenes in order to find a solution and avoid a situation where everyone loses. It is while this Argentine debt crisis was going on that the pandemic arrived.
The government of Argentina reacted quickly to the health crisis. They declared a mandatory quarantine and border closings as soon as mid-March, when the country only had 100 contaminations. By May 5th, there were 5 020 cases (of which over 1 000 recovered) and 264 deaths (about 6 per million population). That's much better than neighboring Brazil who had 116 000 cases and 8 000 deaths (37 per million).
One and a half months of quarantine and a cessation of most activities caused an unprecedented interruption of the economy and a crisis in the payment chain: order cancellations, check rejections, merchandise returns...Concern for the future is increasing because, contrary to the Northern hemisphere, winter is approaching. Prolonging the quarantine could transform the current cash crisis into a solvency crisis, condemning an important section of the local manufacturing machine to bankrupcy and to the destruction of millions of jobs.
The government's economic response was not as quick as it was in the health domain. It came in increments and was centered around two foundations. The first consisted in providing for the demand by forbidding the dismissal of employees for 60 days and by transferring revenus to more vulnerable sectors: out of the total population of 45 million people, 8 million informal and unemployed workers received emergency aid (about 150 dollars per month) in order to guarantee their subsistence and suppress social upheavals. At the same time, an emergency aid program to laborers and manufacturing was created. This included the government paying 50 % of the salary of workers from private sectors impacted by the crisis, various lines of credit with subsidized rates and several decreases in taxes, among others. With these policies, the government is looking to compensate for the drop in company revenus because of the quarantine and gain time while waiting for the economy to resume. These measures represent about 3 % of Argentina's GDP, a different rate from those put in place by Italy and Germany that are higher than 20 % of their GDB.
The government has a clear vision of the economic situation, but the main problem is financing the increase in the budget deficit, exacerbated by the expenses needed to alleviate the crisis and the drop in revenus. Currently, the main lender is the Central Bank of Argentina that is issuing large amounts of money, though other alternatives are being explored such as a wealth tax which could partially help improve the revenus. In an economy as volatile as Argentina's (the current inflation is 50 % per year), this issue raises the spectre of devaluation and inflation, for the country does not have a solvent lender as a last resort, such as the European Central Bank.
Apart from criticism made by liberal economic sectors, the priority is for the government to provide different ways to prevent the massive spread of poverty and to insure the survival of the manufacturing machine, even if it means issuing substantial amounts of money. The risk of a new hyperinflation episode like those of 1989 and 1991 is lessened by other factors that simultaneously work in an opposite direction: (i) the fall of the international prices of raw materials; (ii) the freeze in the price of state services; (iii) the salary reductions due to the quarantine; (iv) less demand making an increase in prices unlikely; (v) foreign surplus; and (vi) exchange rates kept in check which decompresses the demand for dollars on the official market, though it generates different money valuations between the official market and the parallel market.
It is only with a breakdown or a substantial increase in the gap between the exchange rate of the official dollar and the blue dollar that the shortage could provoke a devaluation of the exchange rate and, with it, inflation. A sudden rise in prices could deal a bad blow to the consumer's purchasing power, plunging Argentina's economy in a new depression with unpredictable consequences.
At the opposite end, a successful renegotiation of the debt in this difficult climate would enable the government to proceed with refinancing its capital deadlines and interests, alleviate budget expenses, diminish uncertainty, restore access to credit and, finally, find a way back to growth. In this game of heads or tails, the coin is currently in the air and it's impossible to see today how the pandemic or the renegotiation of the debt will be resolved. That's a lot of uncertainty for a country that hasn't been able to recover from its last crisis yet.
Gustavo Ludmer is an economist (University of Buenos Aires,hosting IdA's local office), Ph.D in economic development (University of Quilmes) and post-doc at the Conseil national pour la science et la technologie de l’Argentine (CONICET).