From Macri’s failed political strategy to Fernández’s wishful economic thinking
Since he lost the August 12th primary, President Mauricio Macri’s policies have changed drastically: he’s been forced to implement measures suggested by his victorious challenger, Alberto Fernández, who is now on track to win the Oct. 27th general election to become the country’s next president.
Fernández criticized Macri’s government for overvaluing the peso, and called for raising real wages and pensions. The only way to interpret such statements is to assume Fernández wanted major devaluation while Macri was still president, to further reduce wages and pensions.
Sharp devaluation did come immediately after the primary, which Fernández won with 47% of the vote, to Macri’ 32%. Surprisingly, Macri’s economic authorities let the price of the dollar jump from 45 pesos to 62, despite the 51 peso non-intervention ceiling. Monthly inflation jumped from less than 2% to above 5%, provoking in a few weeks an equivalent percentage reduction in real wages and pensions. The clear revival of stagflation brought political analysts and market agents to predict that Macri would lose the general election by an even wider margin.
When Macri called Fernández, in an effort to reach some minimum agreements to preserve a climate of stability until the election, Fernandez said he considered the new peso price reasonable, and asked to preserve the level of foreign reserves. He also promised not to interfere with Macri’s economic policy management. But a few days later, after meeting with IMF staff in Buenos Aires, Fernández blamed Macri and the IMF jointly for the recession, the inflation rise, the fall in real wages and pensions and the rise in poverty. And he told the Wall Street Journal that Argentina was in virtual default.
New Economic Minister Hernan Lacunza advised Macri to accept some of the suggestions of Fernández’s economic advisors, and Macri announced on August 28th the “re-profiling” of domestic and foreign debt, in an effort to avoid imposing exchange controls. But heavy dollar demand on August 29th and 30th convinced Macri and his team that exchange controls were inevitable, and on September 1st, the decree imposing exchange controls was published.
Monetary expansion and exchange controls will probably generate a significant spread between the official and black market peso rates.
Fernández’s economic strategy will probably incorporate increased tariffs and import restrictions; higher taxes on exports, energy and other utilities; and price freezes, to try to dampen the inflationary effects of monetary emission and devaluation. He’ll pay public debt in pesos with monetary emission, and the public debt in dollars, after re-profiling, in pesos at the official exchange rate. Fernández and his advisors expect that they can then stabilize the economy, following a plan similar to the one that Roberto Lavagna implemented in 2002. My opinion is that such a plan would bring the economy to the verge of hyperinflation. But it’s too early to transform that opinion into a prediction.
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