Argentina’s Currency Crisis Sparks Global Concerns on Emerging Markets

Image by Gobierno de la Ciudad de Buenos Aires from Flickr.

Since its freefall earlier this summer the Argentine peso continues to hold very little value, trading at about 39 pesos per U.S. dollar. Just four months ago, the peso was worth a much stronger 20 pesos per dollar, which is nearly a 50 percent depreciation in 120 days. The currency depreciation crisis mirrors crises occurring in Turkey and Venezuela, and is yet another chapter in Argentina’s long history of economic problems involving international interventions, banking sector overhauls, and aggressive government intervention.

Concerns are now mounting regarding the limited options available to the Argentine government. Although the currency seemed to hold steady at about 27 pesos per US dollar for most of July, market fears over mismanagement and a similar crisis in Turkey have conspired to make Argentina’s situation significantly worse. This is in spite of a series of reforms instituted in recent days, which include new taxes to raise revenue and sharp cuts in spending.

Argentina’s President Mauricio Macri has been caught in the middle, trying to stabilize an economy and run a re-election campaign while attempting to placate the country’s foreign investors. The largest and most controversial of Macri’s reforms has been to seek out a $50 billion USD loan from the International Monetary Fund. The bailout carries plenty of stipulations that may cut into Macri’s power.

Argentina has agreed to reduce its fiscal deficit (the difference between its spending and revenues) to 1.3 percent of its GDP by 2019, a significant decrease from its current fiscal deficit of 2.2 percent of its GDP, or about $12 billion USD. By 2020, Argentina will have to reach a fiscal balance, which it has failed to do in more than a decade.

Other demands from Argentines and the IMF include increased central bank autonomy and spending reductions. Previously, the IMF demanded an interest rate of between 1.96% and 4.96%, payed in eight quarterly instalments starting in 2020. The interest rate was to be based on the amount of Argentine spending, but the IMF has since revised its demands and payment stipulations. Argentina will receive $15 billion USD immediately, and combined with $22 billion in bonds, will hope to pay off its deficit and cover expenditures for fiscal year 2019.

The IMF has previously helped developing countries such as Greece, Ukraine, and Cyprus, but the agreement with Argentina sets a record for the largest loan in the IMF’s 72-year history. Its goal is to increase investor confidence in Argentina, which many see as emblematic of the challenges and potential of the developing world. As a nation on the cusp of development, and one of the few truly “emerging” markets, a faltering Argentine economy could create ripple effects which would be felt throughout the developing world.

Not everyone in Argentina supports the deal, however. In 2001, the IMF exacerbated another Argentine debt crisis by fixing the peso to the dollar. Debt rose, inflation skyrocketed, and Argentina experienced one of the largest defaults in modern history. The average citizen is much more likely to remember the hardship related to an associated Argentine policy that froze bank accounts for lower- and middle-income Argentinians, but the sentiment remains the same. The IMF is not popular in Argentina.

Macri has also sought to reform the government through key personnel changes. He has replaced Energy Minister Juan José Aranguren and Production Minister Francisco Cabrera in moves aimed at increasing long-term consumer and investor confidence, while instituting monetary policies aimed at increasing the value of the peso.

The origins of the hyperinflation are unclear. A quote from Cristiana Fernandez de Kirchner, Argentina’s former president, speaks to how previous presidents ignored inflation problems, instead advocating high government spending.

“[My party’s] model is a growth model and not one of inflation targeting. The inflation-targeting model is a Washington consensus scheme that destroyed [Latin America]. We believe in growth, jobs, and social inclusion and we are going to continue on that line.”

The crisis is not solely attributable to de Kirchner. Other government policies and external factors certainly have contributed to the high inflation and decreasing investor confidence in the peso. A bearish outlook on emerging markets has kept foreign investors away from investing in developing countries, and left states like Argentina struggling to avoid deficits. Argentina has hardly helped its cause though. The country places a 5 percent tax on peso bonds held by foreigners; while the isolationist policy allows greater Argentine control over the peso, it discourages foreigners from buying the currency. On the other side of the balance sheet, de Kirchner’s excessive spending has driven up costs for Argentina, leading to massive public debt. Potential investors see this debt as a liability, signalling the possibility of another default, and therefore are wary of investing in Argentina.

The outlook from global analysts has so far been profoundly negative. BlackRock portfolio manager Geraldo Rodriguez expects the peso to remain at its “lowest historical levels” until the end of the year, while Diana Amoa, emerging-market manager at JPMorgan, signalled that the IMF deal is a positive step forward. “The IMF program will go some way in restoring market confidence in the authorities’ commitment to addressing the economy’s structural weakness.”

The Argentine debt crisis is not just affecting Argentinians. It has the potential to have lasting effects for developing economies around the world. Argentina has had periods of prosperity in the early 20th century, and like many developing states, possesses comparative advantages in agriculture and trade, but lacks the investment to capitalize on its labour and trade advantages. In many ways, Argentina is a litmus test for first-world investors looking for lucrative foreign investments. By continuing to have soaring levels of inflation, Argentina is broadcasting that developing economies with unbalanced budgets are prone to volatility and massive currency swings, which risks global investment in emerging markets.

Argentina and Turkey have drawn comparisons to one another as larger emerging markets that act as potential indicators of global financial crises. While each are experiencing instability, Argentina’s problems are more emblematic of wanton spending and lapses in monetary prudence, while Turkey is suffering from its political slide towards autocracy. Although a full scale global economic meltdown seems unlikely in the near term, a lack of vigilance regarding the dangers of excessive public debt could spook investors and prevent the developing world from receiving vital funding.

Even after committing to reform, the peso has continued to drop. Investors see this as a major issue, as Argentine faith in their own currency is low and the peso is therefore prone to further depreciation.

In this respect, Argentina may be as significant a global economic player as a developed EU nation. Much of the world depends upon it for sound economic policy and growth. It is a bellwether country for the health of developing nations globally and a poor response to its economic crisis may potentially dissuade foreigners from investment in all emerging markets. Argentina has not yet met the demands of financially sound governance and, as a result, is putting all developing markets in peril.

Image courtesy of  Gobierno de la Ciudad de Buenos via Flickr CC BY 4.0

Ian Doty

About Ian Doty

Ian is a second-year undergraduate international relations student in the University of St Andrews Joint Degree Programme. In graduate school, he wants to study I/O Psychology, or the study of workplace efficiency and corporate teamwork. He actively writes about global issues and is avidly involved in Model United Nations. He likes to read, drink coffee, and travel.

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