Argentina’s economy appears to be in trouble again only three years after the election of Mauricio Macri. Macri has brought economic growth and political progress to Latin America through the dismantling of various tariffs, the re-stabilization of energy and transport prices in alignment with market rates, and the removal of political corruption under Argentina’s previous leader, all with the goal of making the country more competitive with other economic powers. However, his far-reaching ambitions, as well as the government’s recent actions, have left Argentina susceptible to crisis.
In the early weeks of May, inflation in Argentina was running at an annual rate of 25.4 percent, compared with the central bank’s target of 15 percent, while the local currency (the Argentinian peso) was in free fall. Theoretically, when an economy is not running at capacity, meaning there is a surplus of labor or resources, inflation helps increase production. However, in the case of Argentina’s economy, increases in inflation rates threatened businesses, banks and the general public. As inflation rises, businesses are forced to raise their prices, and as a result banks raise their interest rates in order to sustain profit margins. Higher rates cause businesses to fail, increasing unemployment and hurting the overall economy.
Today, Argentina’s currency is faltering and its interest rates have been raised to 60 percent, hurting investors who put money and their trust in the economic system after it cured a longstanding debt default from a 2001 crisis. Investors claim that the country must pass a sustainable budget and put forth a coherent economic strategy if it wants to earn back their trust. In regards to steps being taken to remedy this crisis, finance minister Nicolás Dujovne announced measures aimed at regaining consumer confidence, including an imposition of temporary taxes on exports in order to reduce the primary fiscal deficit. This course of action would involve reducing public works projects and the government’s payroll.
Although this action on the part of Dujovne could boost investor morale and stimulate economic growth again, it could have negative political and economic ramifications as Argentina heads into an election year.
President Macri has put in tremendous work during his term to return the domestic and foreign debt he inherited from his predecessor, but he has relied too much on outside capital to fund his country’s credit line. Reliance on the IMF (International Monetary Fund) has put the Argentinian economy in an even more defensive position, as the peso has depreciated amid emerging-market currencies. I question whether Argentina needs to reconsider their current political positions as Macri seeks another term as president. He has had good intentions in re-establishing foreign investor relations, but at this time Argentina needs a more monetarily conservative, stable leader.