ARE ARGENTINA'S POLICY MAKERS LOSING THE PLOT?
It is sad to see the recent deterioration in the Argentinian economy but what is even more frustrating is that Argentina should have been able to avoid it.
The Peso has lost over 50% of its value since the start of the year, inflation is getting out of control and interest rates are at a surreal level of 60%.
Some commentators link this to the tightening cycle in the US but the truth is that most of this is simply related to ineffective and in many cases wrong policy choices.
Argentina's President Macri focused a lot of his attention on re-opening the country to international investors but then did little to nothing to strengthen the local economy and re-activate the depressed manufacturing activity. Macri did a great job in selling Argentina but was not able to deliver.
The net result was that the country received a lot of capital in a very short period of time without implementing sufficient reforms to get the economy back on track. Most of the capital was also issued in USD and was tilted to portfolio flows. Hot money in...hot money out.
At Silk Invest, we started to significantly cut our exposure early 2017 as asset prices by then were already inflated. On the macro side, inflation did not materially decrease and the trade deficit moved in the wrong direction. Simply put, when a shopkeeper puts his/her inventory at 60% discount without increasing sales in volume, it is worrying. Same holds true for a country where the currency was depreciated without any results.
More than ever, Argentina needs to think beyond the IMF and capital flows. Further leveraging the economy may give a short term boost as it has done 2016 and 2017 but it will cost you eventually more.
Mr. Macri needs to admit failure and to structurally refocus his efforts on the real economy and take a hard look at his actions. His initial intentions were good but he needs a new plan. He needs to start telling the world about how he will fix the real economy instead of how much money he needs. Otherwise, the situation will get worse and contrary to other situations, Argentina will need to blame itself if this materializes...
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