Argentina: Plan Hang On

The president has bought time. She has not solved the economy’s problems

THE president “will not leave in a helicopter”, promised Julio Alak, Argentina’s justice minister, last October. An earlier president, Fernando de la Rúa, had done just that in 2001, when all other means of fleeing from his palace were blocked by pot-banging protesters. In October, as in 2001, Argentina was in the throes of an economic crisis, though a milder one. It had defaulted on its foreign debt. Foreign-exchange reserves had dropped to their lowest level in eight years; inflation was 40%; pesos were worth roughly half as much in the “blue dollar” market as at the official exchange rate. President Cristina Fernández de Kirchner looked chopper-ready.

Since then things have calmed down. Reserves have recovered, from $28 billion to $33 billion. Inflation has slowed to 29%. The gap between blue and official dollars has narrowed. This does not mean that the economy is in good shape: it is expected to shrink by about 0.3% this year. On June 9th trade unions held a transport strike to demand higher wages and lower taxes. But few Argentines now think that Ms Fernández will be airlifted from the Casa Rosada before her term ends in December.

She has cheered up Argentines mainly by bringing in more dollars. A clampdown on imports starting in 2012 slowed the outflow. Despite its default on foreign bonds, the government has raised money abroad. A currency swap with China last October has provided $5 billion. In April the government boosted reserves by raising $1.5 billion through dollar-denominated bonds issued under Argentine law. The province of Buenos Aires even managed this month to issue $500m of bonds under New York law, by paying an interest rate of nearly 10%. Collectively, such measures are Ms Fernández’s Plan Aguantar, or Plan Hang On, says Fausto Spotorno of Orlando Ferreres and Associates, a consultancy.

In a country mistrustful of its own currency, this influx of hard cash lifts spirits. The government has used it to buy pesos, which has slowed depreciation and helped hold down inflation. It expanded a nutty-sounding scheme under which Argentines who earn the equivalent of at least $1,000 a month can exchange 20% of their pay for dollars at official rates. The lucky beneficiaries make a killing by buying pesos in the blue market at a 40% discount, a practice known as “making puree” (perhaps because overvalued pesos are turned into lots of cheaper ones). This is expensive: Mr Spotorno estimates it will cost $6 billion this year. But it serves the purpose of propping up the blue-market peso, which eases fears of devaluation.

With lower inflation and more dollars in circulation, confidence has perked up this year. Despite the recession consumers are cautiously starting to spend more.

Ms Fernández may have done just enough to avert a crisis before she steps down as president (she is not permitted to run again). But she has not solved the underlying economic problems. The overvalued peso has made Argentine industry uncompetitive; restrictions on imports have cut factories off from supplies. Liberal spending on subsidies (to hold down energy prices, for example) has pushed the fiscal deficit to about 5% of GDP. By the time Ms Fernández leaves office, reserves are likely to have dropped back to their levels of last October.

Her successor will have to clean up the mess. That means allowing the devaluation that Ms Fernández has fiercely resisted, so that trade can function normally. The next president will have to reach a deal with bondholders if the country is to borrow at reasonable interest rates. Argentines can expect higher inflation and a dose of austerity. No one will want to be its first economy minister, economists joke. If he (or she) stumbles, the future president may have to keep a chopper on standby.