Analysis: Continued Economic Volatility Provokes Cabinet Changes
Category: Instability
Severity: 2 (Low)
Source: Drum Cussac
06/19/2018 (Argentina) - Following cabinet changes made by President Mauricio Macri, the US dollar finally dropped slightly against the peso on Monday, 18 June, after a week in which the Argentine currency lost 11 per cent of its value relative to the greenback. Macri's announcements chiefly concerned the Central Bank, the Ministry of Finance and, a handful of days later on Saturday, the Ministries of Production and of Energy. The heads of the latter two bodies were replaced while the head of the Central Bank was effectively dismissed through pressured resignation, with the erstwhile Minister of Finance chosen to be the new Central Bank head; the Ministry of Finance will now be absorbed into the Ministry of the Treasury. Of the changes, the resignation of Central Bank ex-Chairman Federico Sturzenegger sent the most political shockwaves, though it was arguably also highly expected due to the multiple runs on the peso the Bank had largely been unable to stop.
The cabinet changes came just a few weeks after currency runs began against the peso in late April, at which time the peso's more gradual devaluing began to spike. This has been attributed to a number of factors, including a newly imposed tax on foreigners' holdings of Central Bank debt, rising interest rates in the US and a general lack of faith in government policy following its perceived wavering on deficit- and inflation-targeting. Although the Bank under Sturzenegger spent billions of US dollars in foreign reserves to prop up the currency during these runs, the Macri administration nevertheless felt it prudent to approach the International Monetary Fund (IMF) in May for a standby loan agreement of USD50 billion, which could theoretically keep the country afloat through the next two years and certainly through the rest of Macri's tenure, which is scheduled to end in late 2019. However, the peso's position vis-a-vis the dollar continued to deteriorate through May and into June even as details of the IMF agreement were made public, and many blamed the Central Bank's actions under Sturzenegger, who initially promised a new policy of relative non-interference in letting the peso float but then staged multiple foreign reserve interventions. The credibility of the Central Bank thus came under further scrutiny, as it has long been accused of being too politically close to the executive branch, and Sturzenegger was ultimately forced to resign on Thursday in order to restore market confidence in the Bank.
The peso's slight recovery against the dollar on Monday by some 44 cents is perhaps a sign that investors are at least entertaining a "wait-and-see" approach regarding how the Bank will act under new Chairman Luis Caputo. Caputo, who is known to have Macri's trust, is expected to make the Bank's policies more cohesive and transparent so as to boost market stability. Although the peso is still expected to float, Caputo is likely to design policy to maintain this within a certain band or else to curb the peso's fall, as the Argentine public is unusually sensitive to the currency's position relative to the US dollar for historical reasons. Due to regular bouts of inflation and even hyperinflation, the dollar has long been a reserve currency for Argentines, and extreme peso depreciation risks signaling to the public that it should liquidate its pesos for dollars in what could be a mass panic reminiscent of the financial crisis in 2001. Indeed, though the major news item for the country last week was a historic abortion decriminalisation vote in the lower House of Deputies, many on social media platforms decried what they cynically viewed as the government and Congress using social issues as a smokescreen while the peso tanked against the dollar, denoting just how charged the topic of the dollar is even among ordinary Argentines.
In tandem with the cabinet changes, Macri is expected to speed up the economic "gradualism" that has defined his administration since his term started in late 2015. That gradualism has at its core the curbing of inflation - currently estimated at 26 per cent - addressing the fiscal deficit and restoring economic growth. So far, austerity measures meant to achieve these goals have been gradually implemented by Macri, but the loss in market confidence as well as the terms of the IMF agreement have moved the president to concede that he now may need to speed up economic policies that were already unpopular at their current pace, such as the phasing out of government subsidies for utilities. However, the government's bet appears to be that these measures along with the IMF standby loan will be enough to significantly lower inflation and spur robust economic growth by next year, at which point Macri will likely be running for re-election. Many have pointed to the short-term pain of his economic policies as well as to the torrid reputation the IMF has in Argentina as reasons why Macri is unlikely to be re-elected. However, the Peronist opposition remains heavily divided between camps loyal to former President Cristina Fernandez de Kirchner and so-called "dissident" Peronists. Nor is there a non-allied figure with enough stature to challenge Macri from the centre or the right, as Macri has done an overall decent job in maintaining the cohesion of his Cambiemos centre-right bloc in Congress. Unrest over economic woes will assuredly continue through the rest of Macri's term, but predicting his political demise as a result of the unrest remains unwise.
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