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By: Sasthaa Gingee Babu, Takyeon Kwon
Research Head: Shreya Kasibhatla
Editor: Akshat Daga
Illustration by Michelle Faith Lee Abstract This paper will be looking at the state of the economy of Argentina and attempt to explain how it got here. It will give a brief overview of its history with mention of Juan Peron and Peronism and how it was once one of top 10 richest countries of the world. This article will also examine the current predicaments that the economy finds itself in and analyse some of the reasons as well as the direct/indirect causes for them such as the currency pegging, the drought of 2018, currency controls and such. In conclusion, the paper will go on to talk about the current government’s outlook of this situation and the action forward.
1. Current Situation With a Gross Domestic Product of US $470 billion dollars as of December 2019, Argentina is one of the biggest economies in Latin America. However, a history riddled with economic volatility and mismanagement by the government has slowed down the country’s development. The country’s GDP fell by 3.4% in 2019 and is estimated to fall by 1.6% in 2020. Inflation rates are estimated to be around 45% in 2020 which is only slightly better than the 52.8% that was experienced in 2019. The country is expected to be in recession for the whole year of 2020 according to reports by Passport. The interest rates in 2019 were raised as high as 78% and the poverty was also the highest in the country than it has ever been since 2001, reaching rates of 35.4%. The current situation in Argentina comes from a long history of Economic Crisis, starting from the pre-Great Depression era. Argentina: Inflation Rates
Argentina: Interest Rates
Argentina: Poverty Rates
2. Historical Overview During the pre-Great Depression era, Argentina was considered to be in the top 10 richest countries. The economy grew as a result of exports during the World War 1 era. The country heavily depended on external demand for its growth and prosperity. When the Great Depression came about, demand for imports in other countries dropped and as a result of this, Argentina found itself in a slump which lasted until 1946, when Juan Peron came to power. Juan Peron was arguably one of the most influential leaders of Argentina. Even today, current President Alberto Fernandez, is a Peronist. Peron’s policy, which is now known as “Peronism” is a form of protectionism and corporatism. This policy was also followed by Taiwan and was beneficial for them as it was executed well. When Peron executed it, it was characterised by withdrawing completely from the foreign market. The government monopolised all foreign trade. Political instability also contributed to this flawed execution of protectionism. (Tom Bailey, 2016)
Argentina attempted to liberalise in the 70’s but the companies that were present at the time were too weak as they were shielded from the world marker for almost 30 years. This made them pale in comparison to the international companies that were thriving for multiple years. As a result, the stagnation period which emerged during this time lasted from 1975-1990. Inflation rates also reached a record high of 5000% Argentina: Inflation during the stagnation period
2.1 Currency Pegging (1990-2002) Argentina was now entering the 21st century after facing high interest rates in the 80’s. In the 90’s, the government, under Carlos Menem, decided to peg the Argentinian Peso against the US Dollar in an attempt to reduce the inflation rates and to reduce the price of imports. This worked for a while and the currency achieved the much needed stability. However, this was short lived. With the appreciation of the dollar in the late 1990s, the Argentine currency board experienced overvaluation. Argentina’s exports became less competitive on the world market.
Value of Peso compared to Dollar
Over the course of two years, output fell by more than 15%, the Argentine peso lost three-quarters of its value, and registered unemployment exceeded 25%. 2.2 Currency control (2011-2015) The government, under Cristina Kirchner, began requiring exchange houses and banks, who could previously conduct individual transactions with little oversight, to submit their clients' tax-identification numbers online to the federal tax agency for approval. (D.S., 2011) Value of USD in exchange markets and Black market
The exchange rate was officially 9.8 pesos per dollar, but because of the controls that limit access to dollars, they were being sold in the black market for about 14.5 pesos.
2.3 The Removal of Currency Control (2015) In 2015 December, Mauricio Macri, the last president of Argentina came into power. Having a centre- right political background, he lifted currency control, which made Argentine Peso artificially overvalued against other currencies including US Dollar. As soon as the control got lifted, the value of Argentine Peso declined by 30%. This depreciation forced the central bank of Argentina to raise its interest rate to around 25% to curb the caused inflation (Congressional Research Service, 2020). However, it was just the beginning of the depreciation and inflation for the coming years.
3. The Causes of Current Crisis in Argentina Argentina’s budget deficit and its monetary policy worsened the crisis. Since 2011, Argentina has continuously made budget deficits which amount to more than its tax revenue. To finance it, the government decided to increase its money supply in the market (Luc Cohen, 2018), which is why the money supply of Argentina in 2019 Q4 is nearly four times bigger than that in 2014 Q1. Consequently, this policy results in the worsened inflation and depreciation of Peso, which brought further inflation caused by the rise in import price.
The Budget Deficit of Argentina
Drought in 2017 and 2018 also drove the Argentine economy into a further crisis (Jonathan Gilbert, 2018). The agriculture sector holds a significant portion of the economy- 10.8% of GDP (Cia world factbook, n.d.). The drought increased the flood price of the country, which contributed to the inflation of Argentina. Food Price Inflation
The increase in the interest rate of the US heavily impacted Argentina. Since late 2015 December till mid of 2019, the Federal Reserve Bank (FED) started increasing the interest rate of the US. It created
a capital outflow from the developing nations including Argentina to America (BBC, 2018). Although not all developing nations got seriously damaged, Argentina was seriously affected owing to its budget deficit and unstable economic status. The interest rate of the US
Argentina Capital Flows
After 2014 and 2015, the capital outflow problem of Argentina exacerbated. The monetary policy of the US is pointed as one of the key causes of the capital outflow by many journals (Luc Cohen, 2018). The outflow brought depreciation of Peso, which again increased the import price in terms of Argentine Peso. Under such economic circumstances, the concerns that the Argentina government would declare default and fail to pay its debt, which is accumulated by its continuous budget deficit grew. It required the Argentine government to send a clear signal that it can pay back its debt, which is why Argentina government sought an IMF bailout, which amounts to 57 billion USD, the biggest in history.
4. The Plan of Current Government Fernandez’s government, inaugurated on December 10, is set for tough talks with creditors to restructure around $100 billion in debt to avoid a damaging default after former president Macri’s administration was dogged by economic crisis. 5. Conclusion Martin Guzman, the country’s Economy Minister, has been appointed to lead restructuring talks with private bondholders and other creditors, including the International Monetary Fund, which agreed to a $57 billion financing package with Argentina in 2018 (Greif, 2019). The new president’s big idea is to reverse Mr Macri’s sequence; with a belief that growth will lead to a revival of confidence rather than the other way round.
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