Argentina is proving to be a perfect example of why politicians aren’t able to embrace proper monetary policy. Currently, President Mauricio Macri is in a serious catch 22. The more he tries to do to shore up Argentina’s financial situation, the less likely he is to win reelection in 2019. That’s because the proper measures that need to be taken in order to help the country's economy aren’t always popular, but are necessary.
Recently, Macri has taken on one of the largest loans ever from the International Monetary Fund and has made a promise to cut spending and raise taxes. This comes at the same time that the Argentine central bank has pushed interest rates to the highest levels in the world. But money managers at firms like Blackrock simply aren’t convinced that he’s going to be able to retain his position long enough to have an impact.
Isabelle Mateos y Lago, the chief multi-asset strategist at BlackRock Investment Institute, told Bloomberg: "The determination of the Argentine government to do the right thing is not in doubt, but its ability to do it for long enough is. That has prevented markets from rallying more convincingly so far."
Meanwhile, Macri's popularity levels have dropped to all-time lows, with support for him falling to 31% in early September as Argentina fell into its second recession in three years. The country has seen its currency collapse along the way.
To make matters worse, every step that Macri has taken to shore up the economy has made him less popular and has given ammunition to his political opponents. Even turning to the IMF for help is an unpopular move because many Argentines believe that the country's economic quagmire in 2001 was caused by the IMF. It's truly a lose/lose situation for Macri that has been reflected in his approval rating.
One of Macri’s opponents in 2019, former President Cristina Fernandez de Kirchner, is going to wind up the beneficiary of his unpopularity - all simply because of the hard line Macri has taken on monetary policy.
James Gulbrandsen, a Rio de Janeiro-based money manager, told Bloomberg: "People will always vote with their wallets. The economy typically trumps outrage over corruption."
In addition to Fernandez de Kirchner, Macri will face a field in 2019 that includes Juan Manuel Urtubey, centrist governor of Salta who’s affiliated with the Peronists and Sergio Massa, who is the ex-chief of staff to former President Fernandez.
Times are desperate when Fernandez looks to be one of the best options. She was actually indicted last month after a probe turned up enough evidence for corruption charges. According to Bloomberg, Fernandez was accused of:
..."illicit association" and of having received bribes from public works contractors during her tenure in the presidency between 2007 and 2015, according to court documents. Fund managers also blame her for years of currency controls that deterred foreign investors, a decade-long dispute with creditors and a system of subsidies that fueled the budget deficit.
Gulbrandsen continued by saying: "Foreign investors will probably throw in the towel and give up on the country if it returns to Peronism."
Some believe that Juan Manuel Urtubey would be better than other Peronists, as he is at least seen as providing tacit support to the mission of spending cuts after attending a recent press conference with Economy Minister Nicolas Dujovne. Macri making it to the election in 2019 would be an accomplishment in and of itself. According to Bloomberg, no non-Peronist has ever even finished their elected term over the past seven decades.
We had previously written about Argentina's collapsing currency. In that article, we noted it was the worst performing currency of 2018 and that this was sending massive shockwaves through Argentina’s economy.
At the time, Argentinian residents who voted for President Macri went on record telling Bloomberg they "wouldn’t do it again."
"I see a country that’s lost its way. They need to find a way to stop this slide," one 46-year-old bank worker told Bloomberg after buying some dollars she hoped to sell later. She concluded, "The problem is, they don’t know what to say."
The paradox taking place in Argentina mirrors the United States in the sense that politicians are afraid of setting any kind of a hard line when it comes to monetary policy. This has led to the United States slipping into decades of quantitative easing that will certainly, at some point, put our country in the same boat that Argentina is in now. The question is not "if", but rather "when".