With rising interest rates in the United States and emerging markets feeling the impact of the dollar boom, Argentina is one of the countries that have been hit hardest by investors. Fearing that those who rely heavily on U.S. dollar credit will feel the greatest pressure, investors assert that the country must approve a sustainable budget and communicate a coherent economic strategy rather than just asking for fund support.
On Monday, Finance Minister Nicolás Dujovne announced measures aimed at restoring investor confidence, reducing the main fiscal deficit (which is expected to be 2.6% this year) to 0% of GDP in 2019. Government ministries, and reduce public works projects and national salary expenditures, these actions will be politically risky before the elections in Argentina next year.
Argentina’s currency is at risk, and its interest rate has been raised to 60%, which has hit investors who have flocked to the country after overcoming debt defaults in recent years.
After the Argentine government raised its inflation target in December, confidence in Argentina began to weaken, which caused investors to doubt the independence of the central bank. Although inflation far exceeded the new target, this uncertainty intensified when the central bank lowered interest rates in January. As the pressure on the peso increased, the central bank began to use its reserves to maintain the currency. It sold $1.47 billion on April 25, which was the largest intervention in the spot market in years. But this had little effect. In eight days, the central bank unexpectedly raised interest rates, raising it to 40% in early May.
To curb the currency crisis, President Mauricio Macri sought financial support from the International Monetary Fund. In June, the government and the International Monetary Fund reached a loan line of $50 billion, and central bank governor Federico Sturzenegger resigned and Luis Caputo succeeded. Although this move was initially supported by investors, the Argentine peso continued to depreciate due to a run on emerging market currencies, which made it more expensive to repay the country’s foreign debt. Last week, Macri appeared on TV and asked the International Monetary Fund to speed up the payment of the rescue plan to repay next year’s debt, which caused the peso to sink further and asked the central bank to raise its interest rate to 60.%. Duyovne plans to meet with the International Monetary Fund in Washington after announcing spending cuts and imposing new taxes this week to request the funding.
Beginning in 2016, Argentina quickly accumulated debt and reinjected funds into the troubled economy, trying to fund the spending policies of Cristina Kirchner, the predecessor of Macri, who had gradually abandoned Macri. This direction aims to avoid social unrest caused by sharp cuts in spending.
But investors say that the government has postponed unpopular fiscal adjustment measures, which will make Argentina less dependent on foreign capital.
Due to the poor inflation rate and recession prospects, Macri’s popularity is declining. In the face of next year’s general election, the Argentine government’s austerity measures are politically risky, because Argentines have been upset about the rise in service fees and opposed the new tax, while the powerful unions will oppose the new tax and cut national employment.