The Argentinian peso currency crashed last week and the main stock market index lost more than 31 percent. The country has also been in recession since mid-2018. In short, Argentina is not doing well. A few questions about the country's economic crisis.
What? Economic crisis?
Yes, economic crisis. The Argentinian economy has been in recession for months. The economy has been shrinking since 2018 and it does not seem to get better soon. Credit rating agency Fitch lowered economic expectations last weekend and predicts an economic contraction of 2.5 percent in 2019.
Current problems are related to, among other things, the end of the 'boom' in commodity prices, says Marijke Zewuster, head of Emerging Markets at ABN AMRO. The country feels the lower prices in the export of soy products, the most important export product.
In addition, the low commodity price also exposes "years of more or less mismanagement," says the ABN AMRO economist. In particular during the final years of former President Cristina Fernández de Kirchner. "That manifested itself in foreclosing the own market, with the result that there was a scarcity of everything and a black market emerged."
And there were some more hits last week, right?
Certainly. The value of the Argentine currency, the peso, plummeted. Where on Monday morning 45.21 pesos still had to be paid for every dollar, this was 54.84 pesos at the end of the week. The most important Argentinian stock exchange also suffered: it lost more than 31 percent last week.
The shock reaction on the financial markets came after the center-left competitor Alberto Fernández defeated incumbent President Macri in a primacy. Financial markets are not happy with Fernández, because he is in favor of a more protectionist policy, with more government interference in the economy. The current president is in favor of a free market.
Whether the fear is justified, leaves Zewuster in the middle. "Macri has been there for four years now, in that time something could have happened." The economist says that the reforms were first and foremost done to prevent the population from being confronted. This changed when it went wrong last year and the country went to the IMF. "Then he had to switch from a gradual reform policy to a more intense one. That didn't help him politically."
What effect does this economic disaster week have?
The consequences are considerable, in particular for the repayment of the debts of the country. Argentina has a government debt that is growing very fast, where the government debt was still 56 percent relative to GDP in 2017, it exploded to 86 percent in 2018.
"Argentina, unlike Brazil, has the most debts in foreign currencies, especially in dollars. If the currency falls in value, it becomes much more difficult for Argentina to pay off those debts," Zewuster explains.
Credit reviewer Fitch warned last weekend that bankruptcy is a real option. What does that mean?
"The lower rating makes it harder for Argentina to borrow," says the ABN AMRO economist. They must do this to finance the current account deficit. "And the worse the creditworthiness, the more expensive borrowing becomes."
So a kind of vicious circle: a lot of debts and the economic climate is deteriorating, which means that borrowing only becomes more expensive. Do lenders still want to borrow from Argentina? That is just the question. "Hence the fear of renewed defaults," says Zewuster.
So for Argentina it is hoped that Fernández will not win the elections?
In October, the Argentines have to go to the polls for a new president. Should voters listen to the financial markets and not to vote for Fernández?
"Markets are rightly afraid of Fernández, but the problems of Argentina are such that you should be afraid of that. Even if Macri wins, that does not immediately mean a hosanna atmosphere," said the ABN AMRO economist.