Inflation and FX volatility reflect the weakening possibility of economic reform
Firms should brace for worsening economic conditions in the coming months, particularly regarding inflation and FX volatility, which will lead to demand destruction. Most importantly, firms should closely monitor the strife within the coalition. As Vice President Cristina Fernandez de Kirchner and her faction continue to rally the opposition against President Alberto Fernandez, the IMF-required reforms will become less likely, leaving the country without the credit that could bridge the country’s gradual transition to sustainable finances.
Overview
Martin Guzman, a close collaborator to President Fernandez, announced his resignation as minister of economy this past Saturday amid growing tensions inside the ruling coalition. The exiting minister, a moderate advocate for the country’s economic normalization, struggled against the left wing of the government led by the vice president. Her opposition to Guzman’s attempt to lower energy subsidies was the final straw that precipitated his resignation.
After 30 hours of tense negotiations, the presidential spokesperson announced Silvina Batakis, a low-profile heterodox economist from the Peronist party, as the new minister of economy. Batakis vowed to maintain the government’s economic plan in an attempt to mitigate a new run against local assets. However, there is little confidence in political and business circles that she will be able to achieve the needed reforms.
Our View
Guzman is not the first presidential collaborator to resign due to internal opposition. However, his resignation is the most consequential and will serve to cement long-term investment uncertainty. Despite lackluster results on many issues, Guzman had been able to restructure Argentina’s debt with private investors and signed a new IMF agreement for US$ 44 billion with lax requirements. Moreover, he was the government’s biggest advocate for fiscal responsibility and a stricter monetary policy. This recurrently ignited Cristina Fernandez de Kirchner’s opposition, which calls for more government spending as a way out of the crisis.
Argentina was already on weak financial footing, but markets now read Guzman’s resignation as a major blow to the possibility of economic reform. In one day, the parallel exchange rate hiked 10% to 260 pesos to the dollar, fueling already-high inflation, which was over 60% YOY in May. Argentine bonds and equity plummeted 11.5% on average, while the country-risk spread, which was under 2,000 points in early June, is now over 2,500. Ultimately, this situation erodes the country’s access to private financing.
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