Forbes: (Argentina) Economic activity is almost dead and inflation is not even near to be defeated," he


Active Member
January 24, 2019

It is hard to imagine a more delicate situation in Argentina than this. The next president holds the biggest International Monetary Fund loan in the fund's history. Defaulting on it would literally close Argentina for business, and surely from international lenders. Debt is rising. The economy is shrinking yet again this year with maybe a blip on the heart monitor in 2020.

Investors are starting to consider life without Mauricio Macri, the Buenos Aires businessman who vowed to save Argentina from Kerchnerismo only to later usher in the return of the International Monetary Fund, the most hated institution in the Americas, if not the world.

With an election year upon us, investors in Argentina's high yielding bond market are looking at who might replace President Macri if it's not Cristina Kirchner herself. It's a close call. But one thing is certain, no matter who wins, the IMF stays. If Cristina wins and kicks them out in a default, Argentina's economy slips back into a recession in 2020. For now, the IMF is forecasting growth next year, and contraction this year.

The current voters are divided between roughly a third pro-Macri, another third pro-Cristina, and the rest wanting a fresh face.

There are many potential candidates out of the Macri-Cristina box, including Maria Eugenia Vidal from Macri's Cambiemos party. Vidal is the governor of Buenos Aires province. She has not stated an interest to run, however.

Among the Peronist parties, they all seem to cannibalize each other with former presidential candidate Sergio Massa the most popular. And his popularity rating sits at around 23%.

There has been a lot of noise lately on the emergence of former Economy Minister Roberto Lavagna as the potential compromise candidate. He has a favorable rating of around 49% against and a negative rating of 35%, which practically makes him a shoo-in.

"It’s too soon to worry about whether he’s a genuine threat since he would need to consolidate support among a competitive pool of candidates and convince everyone that he’s not only the best moderate Peronist candidate but also a better option than Cristina," says Siobhan Morden, managing director of Nomura Securities. "The moderate Peronists are not a worst case alternative (to Macri) since most would accept the economic reality of an IMF program," she says.

Argentina Peso About To Get Weaker

Cristina Kirchner. Investors doubt she returns. She is the greatest default risk, but even some bondholders hold out the belief that a CFK victory would see her sticking to parts of the IMF plan.

BNP Paribas expects the Argentina peso to start slipping considerably as election uncertainties come to the forefront in the months ahead. No growth in the economy this year, coupled with nearly 25% real interest rates make the central government debt unsustainable.

"We were bearish in the fourth quarter of 2017 against consensus and we see the current situation reminiscent of 2018. We maintain our bearish outlook," says Gabriel Gersztein, global head of emerging markets strategy for BNP Paribas in Sao Paulo, Brazil. "Consider buying protection in Argentina," he says about investors hedging their bets against the peso.

Argentina is surviving on IMF life support. In the first half of the year, it owes lenders $45 billion. Of this total, $19.6 billion accounts for intra-public sector liabilities. There's no rollover risk with the domestic public entities, the exponential rollover cost makes debt payments untenable.

According to BNP, Argentina’s public debt needs in 2020, Macri's second term or a new president's first is as low as $50 billion and as high as $98 billion between then and 2023.

Argentina's ex-Economy Minister Roberto Lavagna is no stranger to the IMF. He dealt with them in 2002 in the one-year presidency of Eduardo Duhalde. Cristina Kirchner's husband Nestor later defaulted on a mere $3 billion in debt. The current IMF program of President Macri is 20-times that. A default would basically close Argentina for business, therefore the IMF is locked in. Photographer: Ken Cedeno/Bloomberg News photo credit: BLOOMBERG NEWSBLOOMBERG NEWS
Whoever is president in 2020 will have to deal this record-breaking IMF package, a package that is roughly 20 times larger than the $3 billion IMF loan defaulted on in 2003 when Nestor Kirchner became president.

Argentina will have to slash government somehow without cutting into social services need for those crushed by a two-year-old recession. They will also have to cut interest rates. Luckily they have room to do so. But because faith in the peso is so low, there is a decline in peso credit. Companies are not taking out loans, surely not in pesos.

Credit demand contracted 15% in real terms year over year. The economy contracted nearly 3% last year and is expected to contract by around 2% again this year.

There are also high and unsustainable tax pressures on the economy, equal to about 42% of GDP, and a debt load equal to 95% of GDP as of September 2018. Some 79% of that is in dollars.

"I wouldn't be bullish on Argentina," says Fernando Pertini, partner and CIO of Milennia Costa Rica, a private wealth manager. "This is not about the return of Cristina. This is about the failure of Macri's economic policies. Economic activity is almost dead and inflation is not even near to be


Argentina is headed down Venezuela style and yet it doesn't have to be that way.

Is it a surprise that Argentina once again decided to kick the can down the road collectively by postponing the inevitable facing of reality? This happened because of denial. No proud Argentine wants to believe that they are like Venezuelans, politically speaking, with an exaggerated sense of entitlement, with no understanding of the disconnect between a privilege to an ability to live within one's means. The latter is the reality on the ground today that hasn't yet registered in the way of thinking out loud, the way it should be done on a late Friday night when the streets come to life and everyone is happy again in spite of not having money for the obvious reasons. Everyone shrugs problems off so easily as if not caring, or maybe they really don't care.

Recognition of facts is the first step to problem-solving, although facts are often times subject to manipulation, neither should all responsibility be transferred to elected few, unless populism feels great from some kind of a psychological point of view (sarcasm).

The concern should be on the ultimate truth and not the secondary source of information -- misinformation that is, especially when the history of this country can tell us so much about the poor decision making of various super-presidential candidates whom often lacked the experience to steer the economy in the right direction and reform just in time to avert economic downturns. But what downturn? There are five new bars in my neighborhood alone, clearly demonstrating the demand-driven tendency to forget and not care instead of trying to image a way out of the real problem with the economy and the failing currency. No one is saving and nobody is prepared for another cut in their purchasing power via devaluation and the oncoming hyperinflation, in a way encouraging people to not save and to spend instead their little weekly income.

Currently, the so-called "promise of change" seems to be too conceptually simplistic and overly-optimistic, with no sacrifice and no real re-balancing the way that laws usually work -- it's imagined arriving miraculously with the re-election of "the right" candidate, the more populist the better, with too little or no emphasis on strategic planning and accountability, the way it has been done with Macri, the Good new vs. the old Evil, missing the point entirely.

Missing the urgent need for collective understanding through fact checking + gathering (yes it takes effort) and then by sustained strategic pressuring on the newly elected leader (more sacrifices), as well as demonstrating an effort to end the crisis in a correct verifiable controlled way by starting with reforms in labor laws and the enforcement of the rule of law (why comply otherwise?), and finally putting an end to years-long impunity and corruption, much like the way that Poland did this when the soviet union collapsed in the early 90s. Back when their fuel was rationed and supermarket shelves were empty, when people were not doing well at all and crime was rampant, yet they had ideas and were willing to fight corruption fast, there was no gradualist-plan para manana, it was all about here and now.

Today Poland is the envy of the European union because of their collective resilience, their remarkable ability to weather out economic turbulence in the EU markets and the Polish people are accepting of the concept of voluntary austerity for the benefit of their own economy during times of fiscal consolidation, nobody there would protest and block shipping routes because someone didn't get enough money, that would be too selfish and ignorant to do and quite damaging to the economy, so why do we still do it? Why are we still approving of this kind of behavior instead of marching against corruption in demand for law reforms?

When Venezuelans so readily voted for a delusional truck driver full of baseless socialist ideas in his mind, the oil was still good enough to fund the obviously unsustainable government-backed social safety nets and the bloated government, much like that of Argentina now, minus the oil.

Maduro's ideas reflected theirs and together, ignorance didn't feel like a bad idea in the face of the recommendations from various experts, there were plenty of warning signs and lots of people left the country before it all unraveled. In other words, the Venezuelan public refuse to think for themselves and risked their own freedoms by choosing populist propaganda over the more arduous task of nation-building for the sake of self-reliance and independence, they knew they didn't have a domestic industry to fall on and yet nobody cared, how can such nation be called sovereign? Now both Russia and China are pulling the strings in the opposite direction from where the United States would want Venezuela to go. How ironic is it that the very people who fought for their sovereignty were the ones to give it up for free.

It all ended up imploding, of course, once the price of oil crashed and the droughts hit their agriculture all at the same time, their dams didn't have enough water to generate electricity to power their factories. To this day, many Venezuelans of all classes, still do not recognize their own past delusions and blame it on some kind of dollar conspiracy that destroyed their petrol industry (kind of like we blame the dollar now for the eroding purchasing power of the peso) and their economy while further aggravating the situation and inviting the Russians to exploit their domestic instability while still believing the official government's story.

Argentina is not immune from hyper-inflationary outcome once the IMF funds dry up in 2020 when there is absolutely no money, to not only start paying back the monstrous debt, mostly denominated in dollars, but to also pay back the huge interest rate attached to it. Who are we going to blame then? The evil IMF for trying to destroy Argentina and invade the country by seizing its assets? Remember that we were too passive to resist the decision of Macri's government to take on more debt while the IMF, at the end of the day, is just a for-profit international organization with a sole aim to lend money to whomever in the world in order to make a profit from the interest rate, they aren't supposed to care about the way that people of any given country might feel about their own financial situation or their own inability to repay.

There were those who knew all along that this country could not and cannot grow itself out of debt and like all debts, they must be repaid eventually, the higher the debt -- the higher the interest on the debt.

Please tell me dear reader, who allowed the newly elected government to agree to world's biggest IMF loan? There was no referendum on this! And the protests against the loan were smaller than the protest against necessary tariff increases, we got it all in reverse. If we are to be accepting of austerity out of necessity because the country cannot afford to fund its own liabilities then why couldn't we engineer the austerity from the beginning back in 2015 without borrowing so much? We could have reduced the size of the government, privatized various sectors and regulated various markets in order to cut out inefficiencies instead of buying out unions and various other power-hungry structures in the past couple of years.

Macri was elected to reform and consolidate so that the economy could find new opportunities and attract new sources of investment in order to grow and innovate because of new incentives and natural competitiveness, but instead, all he did is fund the existing inefficient bureaucracy while failing to reform or even negotiate with the opposition. He is quick to blame external factors for the sharp devaluation and yet it was all done by design in order to cater to financial markets, banks and the big government, the industry on the other hand did not receive any support or any benefit for potential expansion except the energy sector. Lay offs will continue because businesses are going bankrupt and the construction industry has run out of steam, people are done laundering their dollars, it's time for reality check.

Macri promised to open the economy to international competition but the truth is such that opening the industry would only cripple the domestic business and put a lot more people out of work because we are unprepared for the much faster and more efficient world out there, almost anybody including some of African nations can out-compete us on the international markets because they have better equipped and better educated work force.
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So what's the answer?
The answer is to implement the following things ASAP:

1. Change the judiciary
2. Enforce regulations and the rule of law in general, including debt collections
3. Restructure the education system from ground up and monitor progress

accountability, accountability, accountability...

This cannot be done solely by the government but the they are responsible ones to start enforcing the laws so that everybody plays by the same rules and learns to respect and value the system and believe in the value of stability, with stability comes investment and progress, and with progress comes economic growth and a wave of opportunities for the next generation.


Can we look to history? What countries were in similar situations who went on to recover and prosper, and how did they do it?