Maria Florencia Humano opened a clothing store in 2016, convinced that Argentina’s long history of economic crises had ended under pro-business President Mauricio Macri.
She will shutter it later this month, unable to make rent or loan payments. Soaring interest rates and a plunging currency have upended her dream and returned Argentina to a familiar place: asking the International Monetary Fund for a lifeline.
Humano’s decision comes just weeks after a somber Macri announced in a televised May 8 speech that Argentina would start talks with the IMF. He is seeking a credit line worth at least $19.7 billion to fund the government through the end of his first term in late 2019.
The unexpected move surprised investors and stoked Argentines’ fears of a repeat of the nation’s devastating 2001-2002 economic collapse. Many here blame IMF-imposed austerity measures for worsening that crisis, which impoverished millions and turned Argentina into a global pariah after the government defaulted on a record $100 billion in debt.
Word of a potential bailout sent thousands of angry Argentines into the streets this month, some with signs declaring “enough of the IMF.”
As recently as a few months ago, analysts were hailing Argentina as an emerging-market success story. Now some are predicting recession. Macri’s popularity has plummeted. Supporters such as business owner Humano say they feel swindled.
“I voted for him. I made a bet and believed in him,” said Humano, 46, who recently moved in with her sister to save money. “Now I don’t believe anyone.”
Show of swagger
It was not supposed to be this way. Macri, a business tycoon, rose to power in 2015 vowing to end capital controls and reincorporate Argentina into the global economy.
He settled with the nation’s remaining creditors and vowed to unwind big-spending policies of his populist predecessor, Cristina Fernandez. The economy grew and unemployment fell. In a show of swagger, Argentina last year issued $2.75 billion of dollar-denominated bonds with a 100-year maturity; investors snapped them up.
Macri’s free-market credentials earned him a 2017 invitation to the White House to meet US President Donald Trump, who just last week on Twitter hailed the Argentine leader’s “vision for transforming his country’s economy.”
But economists say Macri badly damaged his credibility in December when his administration weakened tough inflation targets. The central bank followed with a January rate cut to goose growth, even as consumer prices kept galloping.
Rising US interest rates did not help. Argentina is saddled with more than $320 billion in external debt, equivalent to 57.1 per cent of GDP, much of it denominated in dollars. Jittery investors hit the exits. The peso swooned. The central bank sold $10 billion in reserves trying to prop up the peso, forcing Macri to seek assistance from the IMF.
Marcos Pena, Macri’s cabinet chief, said this week that changing the inflation targets “may have damaged the perception of an autonomous central bank.”
Macri, meanwhile, has defended his quick outreach to the IMF as a way to head off a crisis like those of the past. Market response has generally been positive. After shedding a quarter of its value this year, the peso has stabilised at around 25 per dollar.
Still, the fallout is hitting Argentina’s economy hard. The central bank has hiked its benchmark rate to 40 per cent, the highest in the world. Even so, inflation is still running at an annual rate of around 25 per cent.
Businesses are already hunkering down. French Supermarket chain Carrefour, which employs 19,000 people in Argentina, said last month it will lay off an unspecified number of workers as part of a “crisis prevention plan.”
Small businesses, too, are preparing for the worst, said Eduardo Fernandez, head of APYME, which represents about 10,000 small firms nationwide. The group says Argentina’s return to the IMF represents a failure of Macri’s economic policies, which are now clobbering mom-and-pop operators.
“With this rate increase we can’t request credit, we are in a very difficult situation,” Fernandez said.
A few consultancies, including London-based Capital Economics, predict high interest rates will tip Argentina into a recession this year.
Dollars in mattresses
That remains to be seen. Still, economic cracks are showing. Retail sales contracted 3.0 per cent in April as Argentine consumers curbed spending due to the shaky peso. Consumer confidence fell 8.5 per cent in April from March and 13.5 per cent from a year ago to its lowest level in four years, according to an index from Torcuato Di Tella University in Buenos Aires.
Some nervous Argentines have returned to an old habit of hiding greenbacks under their mattresses. Dollar deposits in Argentine banks fell 2.0 per cent between April 27 and May 14, according to Reuters data BCRA20.
Dollar-denominated accounts are a popular hedge against inflation in Argentina. But the government froze these instruments during the 2001-2002 crisis, forcing millions of savers to accept devalued pesos instead. Some are not taking any chances this time around, Reuters reported.
Fabian Castillo, owner of a Buenos Aires shoe factory, is holding out hope the peso will recover some value. Still, he is struggling mightily with soaring prices for rent, utilities, labour, leather and glue. Meanwhile, cautious consumers are paring extras from their budgets, including his wares.
“Anyone selling perfume, clothes or shoes is having a hard time getting to the end of the month,” Castillo said.