Argentina expects to return to budget surplus in two years

After months of economic uncertainty, this week the Argentinian President, Mauricio Macri will announce the new direction of his government’s fiscal policy. After increasing tensions between the financial markets and the central exchange and amid a rapidly depreciating peso, the “root of the distrust is at the fiscal-political level,” according to Soledad Pérez Duhalde of ABECEB.

Uncertainty is the only stable factor in Argentina’s markets. Distrust of the IMF stems from the Argentinian economic crisis in 2001-02, which many Argentinians blame on the austerity measures imposed by the IMF at the time. Spurred on by political instability in Venezuela – destabilising the region for fear of a knock-on effect – as well as currency shockwaves being sent through Brazil and a more general contraction in emerging markets, Macri’s deal with the IMF has caused national outrage. 

Whether or not Argentinians like it, however, the country has received its first $15 billion in relief funds to stabilize the nation at a macro-economic level. An unintended result has been that many economic agents have hedged their bets and begun hoarding foreign currency, further depreciating the Argentine peso. As the crisis falters for a moment, there is a glimmer of hope, according to management consulting firm ABECEB’s Soledad Pérez Duhalde. 

“Faced with this [distrust], the authorities stepped up the bet with a view to restore confidence,” said Pérez in Argentinian newspaper Perfil. The move is in line with Macri’s correction policies of ‘short term pain for long term gain.’ To show the international lenders that his cabinet is serious about its debt obligations, Macri has announced that it would alter its course back to budget surplus by 2020.

Originally, Argentina was set for a deficit of -1.3% diversion from surplus based on public spending; however, authorities announced this week their intention to achieve a 1% surplus within two years. “This will seek to sell the greatest effort in exchange for an advance of the funds by the IMF and to clear up any doubt about the Government's ability to honor its debt commitments,” said Pérez.

Politics are one thing – and politics and economics are intrinsically linked – but politics aside, the markets are digesting the move favorably. As the market corrects itself and restrictive public spending policy comes into effect, it is expected that consumption and investment will fall, with the recession expected to deepen. At first. 

“Our forecasts now point to an average GDP retraction of 2.2% in 2018 and a stagnant product scenario in 2019, even with a positive contribution from the agro product of the reversal of the drought effect,” said Pérez referring to ABECEB calculations. “Regarding inflation, the nominal depreciation of the currency raised the forecasts to something more than 40% by the end of 2018 and to 25% by December 2019.” 

The consulting firm – a regional expert in both economics and business strategy throughout the Americas – believes the route the government has taken is a hard but necessary return to stability. “In short, the ‘party is underway,’” added Perez. “There is no doubt that the goals that have been set are challenging. The fact that the world has become more complex for emerging markets does not help.”

“But the authorities have reacted in the right direction, realistically, admitting mistakes and compacting the cabinet to improve coordination. Anchoring expectations and restoring minimum levels of trust was imperative. A stabilization program is successful when it is credible. And the authorities are trying to rebuild this credibility that had been weakened by underpinning the integrity, consistency and viability of the program. The steps are given. The last word is missing,” he concluded.