November 27, 2022

Why is Argentina’s economy in crisis and how did it come to this situation?

Read Time:7 Minute, 27 Second


(CNN Spanish) — For Argentines, it is almost like a faithful and very bitter tradition: the country is currently experiencing a new economic crisis that, added to the harsh political situation within the coalition that has governed since 2019, is shaking society and increasing tensions.

For weeks now, the devaluation of the Argentine peso against the dollar in the informal and financial market has not stopped —the “blue” has already exceeded 330 pesos per dollar, a disparity of 40% with the official exchange rate, which remains unchanged—and country risk, an indicator calculated by JP Morgan that evaluates the chances of recovering an investment, reached 2,935 points on Friday, according to Reuters, the highest level since the 2020 bond swap. In comparison, the indicator of Uruguay’s country risk is 136 points and Chile’s is 169.

David Miazzo, FADA’s chief economist, said on CNN Radio that “everything starts with a large fiscal imbalance, which becomes a monetary imbalance due to printing to finance the deficit. And then it moves to an exchange rate imbalance, because the government has The objective is to maintain the official dollar as an exchange rate and nominal anchor. And all this generates a deep delay in the official exchange rate. Today, $130 seems an artificial value, because people and companies are willing to flee the peso to $330”.

“The exchange rate imbalance has several fronts. One where the peso has already been devalued and the issue is how long will the government take to recognize it in the value of the official dollar,” he said.

In Argentina, talking about the values ​​of the different dollars (official, tourist, solidarity, blue, MEP?) and country risk is a sport as popular as soccer, as is discussing whether the current Minister of Economy will be able to the situation or not (more than ever at this time, after Silvina Batakis recently took over the portfolio after the resignation of Martín Guzmán).

“Silvina Batakis does not want to leave her name as someone who did nothing or was naive in her management,” political political analyst Sergio Berensztein said on CNN Radio.

Meanwhile, the country’s economy grew 10.3% in 2021, but only as a bounce after the 9.9% drop registered in 2020 due to the covid-19 pandemic, and in the first quarter of 2022 the Gross Domestic Product grew 6% year-on-year and 1.5% compared to the previous quarter, in agreement with the National Institute of Statistics and Census (Indec).

Argentina economic crisis

A homeless person sleeps on the street next to his cardboard collection cart on June 10, 2022 in Buenos Aires, Argentina. (Credit: Tomas Cuesta/Getty Images)

For this 2022, the Organization for Economic Cooperation and Development (OECD) screened in june a growth of 3.57% of Argentina’s GDP, while the International Monetary Fund (IMF) anticipated, in April, a 4% rise. Meanwhile, a survey of market expectations published in June by the Central Bank of the Argentine Republic (BCRA) located projected growth at 3.2%.

Whatever the economic growth this year, it will occur in the midst of a price escalation that has afflicted the country for at least a decade: the Indec reported in June an interannual inflation of 64%, and 36.2% so far this year. According to survey of the BCRA, which is published monthly, is expected to reach 76% this year.

Adding the growing devaluation of the peso and high inflation, Argentina currently has some of the lowest wages measured in dollars in the region: a minimum salary A monthly payment of $45,540 Argentine pesos is equivalent to US$334 at the official exchange rate or US$135 to the “blue dollar”.

In addition, poverty remains high —reaches 37.9% of the population—unemployment affects the 7%and the government has imposed controls on imports due to the lack of foreign exchange and the purchase of dollars for savings.

How did you get here?

It is not the first economic crisis in Argentina, of course, and in the country great economic slumps like the one in 2001, when the GDP sank while unemployment and poverty skyrocketed and people marched in the streets, are still vividly remembered and discussed. ; the one from 1989, when there was hyperinflation followed by looting; or the one from 1975 known as “the Rodrigazo”, due to the shock and adjustment measures of the then Economy Minister Celestino Rodrigo, followed by the policies of the last military dictatorship. A “half century between economic storms”, as researchers Pablo Gerchunoff, Daniel Heyman and Aníbal Jáuregui point out.

Why is the value of the parallel dollar important in Argentina? 1:38

When the current president Alberto Fernández, of Peronism, won the elections in 2019 and succeeded the government of Mauricio Macri, the economic situation was already bad: After falling 2.6% in 2018, that year the GDP contracted again 2% before Fernández took office in December.

Of the four years of Macri’s mandate, three were recessive and only in 2017 there was a growth of 2.8% (the fall in 2016 was 2.1%). The leader of Together for Change, a center-right coalition, also registered high levels of inflation (53.8% leaving the government, according to INDEC) and poverty (35.3%), and about the end of his term, and, in the midst of a sharp devaluation of the peso, he went to the IMF to obtain a huge aid package, which the current Fernández government has had to refinance.

In this regard, the economist Luis Secco told CNN Radio that the chances of Argentina complying with the conditions of the new agreement with the IMF “are reduced.”

“Today inflation shows that nothing has changed in the Argentine economy. If everything written in the letter of intent (with the IMF) is fulfilled, there should be another additional rate increase, but I think the winter is going to be very hard and fuel prices are going to rise, therefore, you are going to have pressure renewed inflationary

The situation was not much better just before the arrival of Macri, and during the second government of Cristina Fernández de Kirchner, today vice president, the economy It was jumping and falling: it grew in 2013 (2.4%) and 2015 (2.7%), and fell in 2012 (-1%) and 2014 (-2.5%). Also, left an inflation of 26.9%, according to data from the General Directorate of Statistics and Census of the City of Buenos Aires (18.5%, according to the Indec at that time), and a poverty rate of 30%, according to the Social Debt Observatory of the Argentine Catholic University.

(Behind the Indec intervention in 2007, its statistical data began to lose credibility and the use of alternative sources grew to refer to inflation values, which some considered undervalued, and poverty, which the agency stopped publishing in 2013. The Indec was later reformed during the Macri government and recovered its credibility)

Argentina economic crisis

A woman walks past a price banner outside a store in Buenos Aires, Argentina, on July 6, 2022. (Credit: LUIS ROBAYO/AFP via Getty Images)

Gone, it seemed, were the years of economic recovery and strong growth, after the fall of 2001, which characterized the government of Nestor Kirchner (2003-2007, died in 2010) and the first term of Fernández de Kirchner (2008-2011) , his wife.

Why is the economy in crisis?

The economy of Argentina has been jumping and falling since 2011, after a period of growth that began in 2003, while poverty and inflation have maintained an upward trend.

The country has major problems that it has not been able to resolve, including a high deficit in public accounts and spending with a strong social aid component; a major issue of its currency; an economy and informal jobs on the rise; shortage of reserves and liquidity to meet debt payments; subsidized energy tariffs in the context of rising oil and gas prices due to the war in Ukraine; and an eternal mistrust in the peso and the economy in general, built from crisis to crisis.

“Argentina’s problem is multiple: it is political, because we have a crisis of legitimacy, but also economic, because we have not grown for many years,” international economic analyst Marcelo Elizondo told CNN Radio, adding that “Argentina needs to revitalize the private sector” and that “there are countries in which a little more of the State is good, but when one has an oversized public sector it is a cause of poverty”.

“There is another problem that is institutional, which are the guarantees based on which we all make decisions. The prevailing values ​​of society are not virtuous and we must try to correct them,” he added.

It is difficult to put the accent on one component over another, considering that Argentina seems to be in crisis for decades, resembling it more to a daily process than to a specific moment.



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