- + Lockdown extensions continue to destabilize the Argentine economy.
- + Vice President Kirchner adds uncertainty to the crisis of confidence.
- + Fernández looks for aid and investments among new friends.
Why is Fernández’s heat level chilly?
Answer: He promised economic prosperity but the Argentine economy is closer than ever to a complete collapse.
Argentina is currently facing a crisis of confidence that will prove decisive in President Fernández’s ability to avoid another economic crisis. Behind this crisis of confidence is the lack of consistency in the country’s economic policies and of effective control; the population watches as former President Cristina Kirchner continues to influence the Peronist movement, based on the legacy of President Juan Peron and his nationalistic tendencies in combination with social justice, and the government.
Alberto Fernández inherited an already crumbling economy in December 2019, with an inflation rate of almost 240% and a 3.4% reduction in the GDP. Since then, Fernández’s economic policies remain unclear. He vowed not to impose austerity measures such as increased taxes and a decrease in government spending, and to steer clear of the IMF, which has a history with the country. He even vowed to not touch $13 billion left from the $57 billion that former President Macri persuaded the IMF to loan in a futile attempt to save the economy.
However, Argentinians and private creditors are becoming impatient and foreign reserves are running low, down to only $1.6 billion in September this year. Argentinians have been buying and withdrawing dollars from their accounts in preparation for the future. The president managed to appease private creditors around August when they managed to restructure $65 billion worth of debt, after defaulting on a $500 million payment months earlier. Yet, increasingly interventionist policies such as capital controls, import restrictions and price freezes continue to discourage investment in Latin America’s second-largest economy.
Early in the year, Fernández enjoyed a 70% approval rating and was praised for the success of the early lockdown to combat the Covid-19 pandemic and his plan to restructure debt. However, Fernández failed to restore confidence with regards to an effective economic response to the pandemic; the country remains in a state of emergency that was recently prolonged, making it one of the longest, strictest and possibly most detrimental lockdowns yet.
According to the World Bank, the Argentine economy, during the second quarter of 2020, saw a decline in GDP by 16.2%, the peso rate dropped 22% against the dollar and urban poverty reached 40% of the population, all indicators that government efforts have made no progress in mitigating the matter. Inflation, which most Argentines consider to be their most pressing problem, continues to hover above 40%.
Who is changing Fernández‘s temperature?
Answer: Economic uncertainty, Vice President Cristina Kirchner, and the failed response to Covid-19.
Fernández had no following of his own until he reconciled with former President Kirchner, after years of criticising her interventionist economic policies. However, in an attempt to unite the Peronist movement, Cristina Kirchner endorsed Fernández who proceeded to appoint her as Vice President and her loyalists in high posts. Her influence on Fernández’s government is now undeniable.
Besides the volatile markets Argentines are now used to, the crisis of confidence extends to those in power. Public opinion in Argentine polls after restructuring the $65 billion in debt believed that between the president and the vice president, the former held the last word. Months after the disastrous response to restructuring the debt and imposing a 35% tax on foreign currencies, on September 16th, polls show that half the population now believes Vice President Kirchner now has the last say on important matters.
This is increasingly concerning because she is known for interventionist and protectionist policies in combination with money printing and increased public expenditure. On October 28, Cristina Kirchner came forward with a letter to the country where she stated that in Argentina decisions are made by the president, and no one’s opinion is above that. While Fernández later told the press he took it as a sign of support, it is impossible to ignore that she may be trying to rid herself of any responsibility she may have over the economic, political, and, especially, Covid-19-related measures that Fernández’s government has taken.
In the past weeks, the IMF visited Argentina, something that already goes against what the president promised. While they claim to be on standby, the IMF stated it was ready to help whenever Argentina was too. It is unlikely that the IMF would try to impose austerity measures, as it normally requests because of the 40% increase in poverty that Argentina reported due to the pandemic. In the meantime, Argentina struggles with high levels of inflation and an economy expected to contract by 12% with little hope of expanding enough in 2021 to address the damages.
A new IMF program would have to mirror what Macri, the free-market enthusiast, obtained thanks to Donald Trump’s influence. However, this is the plan that Fernández refused to see through before looking for private creditors. Additionally, Fernández will have to deal with either Trump or Biden, who already do not like the fondness of Fernández for the Venezuelan government or public expenditure.
Finally, Fernández’s Covid-19 response gained a lot of praise domestically and internationally. Argentina went into lockdown on March 20th, which led to very low levels of contagion once the virus reached the nation. However, the lockdown, characterised as one of the longest and strictest worldwide, has been extended more than 12 times; on October 25th, it was extended once again. While Fernández abided by the suggestions by the World Health Organization (WHO), he did not follow through with the mass testing and tracing. Thus, Argentina virtually shut down in March with promises of a better tomorrow, but 7 months later what the country has to show for their unnecessarily strict lockdown is an economy in shambles and high levels of contagion.
Fernández confirmed a phone call to Vladimir Putin this week, where he will discuss the acquisition of vaccines from the Russian government as well as future Russian investments in the country. If Fernández decides to go through with this, he will put a strain on the relationship with Trump that Macri exploited for the IMF bailout. Fernández would be putting the Argentine nation in the hands of Putin and abandoning the prospect of an IMF bailout. This would allow him to remain consistent with his initial promises, but the Argentine economy may not be able to recover in time to pay back Russian loans.
What is driving Fernández?
Answer: The need to prove himself.
Alberto Fernández is driven by the need to fulfil the promises that got him the power to prove that they were not ultimately empty. As he struggles to handle the economic catastrophe, Covid-19 and power shifts within his government, President Fernández needs to prove to Argentina that he rose to power not just because Cristina Kirchner gave her blessing. Alberto Fernández’s refusal to devalue the peso is solely proof of his need to be in control of the situation. Devaluing the peso would signify another loss.
The same can be said for the recent relationship with Vladimir Putin. Fernández knows that approaching the IMF would be violating the trust of all those who put him in power as his main critique of former president Macri was that he tried to solve a debt crisis by going into more debt. While a few months ago Fernández looked ready to relinquish the idea that Argentina’s economy could be saved through private creditors, the sudden interest of Putin in the country seems to have provided the push he needed.
Now Fernández has to find a way to show Argentina why it should remain loyal to the Peronists. And in order to do so, he needs to keep the country afloat until Putin provides the promised vaccine and the investments and money starts flowing back into the economy. However, midterm elections, the growing crisis of confidence and the course the economy has taken may not allow him to show the Argentinian population what he thinks he is capable of.
What does this mean for you?
Answer: Another loss for the West
Whether the West wants to admit it or not, Latin America suffers from a chronic crisis of confidence. Putin, unlike the West and its institutions, does not carry the baggage that the former does. Alberto Fernández feels cornered by Covid-19, the crumbling economy and party tensions. Putin offers a potential solution to all three. It sounds too good to be true, and it probably will be.
Economic instability has led many Latin American countries to political instability as the institutions they have looked at for help do so only on the conditions of unsustainable policies. These policies usually lead countries to public dissatisfaction and the instability to pay back their loans. Argentina is choosing a different path in the hopes of a less detrimental outcome.
Argentina took a chance with Fernández, instead of remaining loyal to Macri, who destroyed the economy. Fernández choosing Putin over the IMF and President Trump is the same situation on an international scale. Argentina is choosing to go for the candidate with the least amount of baggage, not only because of the debt Macri took on in 2018 but also due to the history Argentina has with the IMF. With almost $87 billion borrowed since 1950 in 20 different packages, Argentina’s economy has been under the IMF for the better part of a century.
Fernández is simply trying to break the cycle Argentina has been in for the past few decades, which is exactly what the country did when it chose Kirchner, then Macri, and then Fernández. The pattern is already there, but as Argentina frantically searches for answers, looking back is not an option.