Argentines prepare to vote with their economy in “intensive care”

While Argentina prepares to vote in a crucial presidential election, the well-known phrase “it’s the economy, stupid” rings true.

Inflation is at almost 140% annually, net foreign exchange reserves in the central bank are in the red, savers are abandoning the peso and a recession is looming.

The country will go to the polls on Sunday in a race between the libertarian Javier Mileithe surprising favorite in the polls, the Peronist economy minister Sergio Massa and the conservative Patricia Bullrichwith angry voters in the midst of a harsh economic crisis.

“It is an economy that is in intensive care”he told Reuters Miguel Kiguelformer Undersecretary of Finance of the Ministry of Economy in 1999. “The main challenge is to get Argentina out of stagnation, but for that you have to lower inflation”.

The inflation rate of Argentina It reached 138% annually in September and continues to grow, with prices rising over 12% in the two most recent months. JPMorgan has estimated that inflation will end the year at 210%, while a survey of central bank analysts forecasts 180%.

Fernando Morra, former deputy economy minister in the current government, said there could be a risk that prices could accelerate further, leading to a similar hyperinflation situation that the country experienced in the 1980s, when prices rose daily.

““We know that this type of inflation is unstable and makes stabilization much more urgent,” explained. “It is very difficult to control an inflation process at these levels”.

In an attempt to curb inflation, Argentina’s central bank has been forced to increase the reference interest rate to 133%, which encourages savings in pesos but harms access to credit and economic growth.

Capital controls

The Argentine peso has been shackled to capital controls since a market crash in 2019, leading to a wide range of unwieldy exchange rates, where dollars trade for more than double the official price of 350 pesos per greenback

The various exchange rates that exist include the one known as “blue”, which is the one that is traded illegally, and the MEP, which is a dollar that is accessed through bond operations. Also, over time, other quotes were generated such as the “Coldplay dollar” and the “Malbec dollar.”

Two of the three leading presidential candidates, Milei and Bullrich, have pledged to quickly eliminate capital controls if elected. Analysts expect this to lead to a sharp devaluation of the official exchange rate.

Milei wants to completely get rid of the peso and dollarize the economy, while Bullrich plans a bimonetary system of the peso and the dollar. Massa would keep the weight.

Argentina’s central bank’s foreign exchange reserves are near their lowest level since 2016 and, on net terms, are widely considered by analysts to be in negative territory after a major drought hit important exports of grains such as soybeans, corn and wheat.

Low reserves are a threat to the country’s ability to pay debts to its main creditor, the International Monetary Fund (IMF), and private bondholders, as well as to cover key imports.

The government agreed to an expanded currency swap with China to help cover some of its costs and has had to delay some payments to key trading partners such as Brazil.

Recession

Latin America’s third-largest economy is on track to end the year with a 2.8% drop in economic activity, according to the central bank’s latest survey of analysts, in part due to the impact of the historic drought it suffered last year. past and that reduced the corn and soybean harvests by half.

Coupled with triple-digit inflation, that is likely to deepen poverty levels: two-fifths of people already live below the poverty line as wages and savings erode.

“This is an economy that has not grown in real terms, what we call per capita income, in 15 years or almost 20 years.”said Kiguel, citing the impact of inflation and the slowdown in activity.

“Probably the one who lost the most was the middle class because the lower class also lost but had a lot of help from the State through plans and subsidies.”he added.

Argentina, rich in grains, energy and lithium, could see a boost next year as better rains help the harvest, a new gas pipeline reduces dependence on costly imports and increases global demand for lithium, needed for car batteries. electric vehicles.

“There are three assets that Argentina has and if we could value them in the coming years, they would give us a development platform that can change the face of the economic sensation we have at this moment.“said Morra.

“There is an opportunity, obviously we can miss it, we are world champions in missing opportunities”.