It would be an understatement to say that all is not well with the Argentine economy. Despite a US$50 billion IMF support package, the Argentine peso is in freefall, inflation is accelerating, and the economy is heading toward yet another recession. This has to raise questions as to whether it will be Argentina rather than Turkey that is the first to impose exchange controls in response to their respective economic crises.
Since the middle of this year, nothing seems to have worked to stabilize the Argentine peso, which has lost more than 40 percent of its value since the start of the year. Hiking interest rates to 45 percent has not seemed to work. Burning international reserves to defend the currency has not worked. Nor has calling in the IMF done the trick. Indeed, since a US$15 billion IMF disbursement in June, the Argentine peso has managed to lose some 20 percent in value.
Argentina needs to stabilize its currency soon before a free falling currency inflicts further damage to its fragile economy by stoking inflation, which is already running at more than 30 percent. This would seem to be especially the case with likely spillovers coming to Argentina from a brewing currency crisis in Brazil ahead of that country’s October elections. However, Argentina seems to be running out of policy instruments to do that. Interest rates have been raised to their practical limit, the IMF has already been called in to little avail, and the country has only limited international reserves to use in defense of its currency.
Meanwhile, a clear move to greater fiscal discipline to restore investor confidence seems to be an implausible option for the government. Not only would budget belt-tightening likely deepen the economic recession toward which the country now seems to be lurching; it is also that the Macri government would not seem to have the political support for such belt-tightening, especially ahead of next year’s general election. Since having called in the IMF for assistance, President Macri has seen his support at the polls drop from 50 percent to 35 percent.
In December 2015, at the start of his presidency, the Macri government made the crucial mistake of lifting all exchange controls before stabilizing Argentina’s economy and before aggressively embracing deep economic reform. The government now seems likely to have to pay dearly for that mistake. With the currency plummeting and with other options having run out, President Macri may very well soon be forced to reintroduce exchange controls to put a floor to the currency’s damaging free fall.