Crisis Shakes Argentina as Echoes Resound Worldwide
The August victory of the libertarian candidate, Javier Milei, in Argentina's open primaries, which propelled him as a front-runner in the presidential pre-election campaign, has already been dubbed a "political earthquake." He has added to the "tsunami" of rampant inflation and reduced agricultural exports due to drought. Why does this matter? Because the prices of food around the world, including European supermarkets, depend on Argentine grains and vegetable oil.
On October 22nd, the first round of presidential elections will take place in Argentina. The leader in this electoral race is Javier Milei, often referred to as the "Argentinian Trump." In August, he triumphed in the open primaries, leaving behind the current economy minister, Sergio Massa, and former security minister, Sabina Frederic.
Photo: The closest competitor to Javier Milei in the elections is Sergio Massa, running for president for the second time. Now he does it as part of the Peronist coalition "Union for the Homeland." In the 2015 elections, he secured the third position and currently serves as the Minister of Economy. From 2019 to 2022, he headed the lower house of parliament. Source: Sergio Massa Twitter
These were the first primaries where the Peronist political force (currently led by Sergio Massa) faced defeat, and furthermore, it secured only the third position. The incumbent president, Alberto Fernandez, did not run for re-election, as he had very limited chances amid the crisis.
The 52-year-old unconventional politician Milei promises, if elected, to not only eliminate the Central Bank but also privatize unprofitable state-owned companies, ban abortions, relax gun ownership regulations, and legalize organ trade. He also advocates for a "traditional family," criticizes sexual education in schools, and denies climate change.
Another controversial proposal of his is to replace the peso with the US dollar as the national currency.
The majority of political forces have already expressed opposition, stating that "Dollarization is a deception that will ultimately turn you into a colony of another country that dictates your monetary policy," as economist Julian Zikari comments, pointing to the dependency on the US dollar and the Federal Reserve System, which itself tries to address its banking crisis by raising interest rates.
Sociologists argue that as much as 60% of respondents disagree with dollarization.
Milei, an economist by profession, has significant political experience, having been a member of parliament since 2021. He leads the radically right and ultimately libertarian political force, La Libertad Avanza.
In Argentina's recent history, no non-populist president has managed to stay in office until the end of their term. Therefore, the newly elected president's populism is practically inevitable, especially under crisis conditions. But this populism will take a different hue, unlike the traditional left-center Peronism seen in Argentina. This political trend, Peronism, hails from the era of Juan Peron, who held the presidency from 1946 until his ousting in 1955 and again from October 1973 until his death in July 1974.
Why Argentina Matters
Foorball, Maradona, Messi, Eva Peron, Malbec wines, marbled steaks, Tango – these are some of the associations that come to mind with Argentina. In terms of land area, it's the second-largest country in Latin America, the fourth-largest in the Americas, and the eighth-largest in the world.
From an economic standpoint, it's a global leader in the production and export of soy, corn, wheat, sunflower, barley, as well as meat and dairy products. The country also mines zinc, iron, copper, uranium, and other valuable resources, with reserves of oil and natural gas.
But most importantly, the prices in your local supermarket are significantly influenced by the export of Argentine food products.
At the beginning of the 20th century, Argentina's economic potential was compared to that of the United States.
However, natural resources and production prospects do not shield the country from economic crises, which hit the nation in waves with a remarkable regularity last 70 years. According to World Bank data, starting from 1950, Argentina has spent 33% of its time in recession, the second-largest percentage in the world after the Democratic Republic of the Congo.
In the 21st century, Argentina's economic policy resembles a seesaw: currency controls give way to currency release, open borders for trade are followed by closures, and a decade after large-scale privatization comes nationalization.
Throughout its history, the country has defaulted on its debt nine times, and now, according to pessimistic forecasts, stands on the brink of its tenth default. International loans are being used to repay previous debts. All this is happening against the backdrop of this year's drought, which has hit the agricultural sector, and a tumultuous presidential campaign, which adds even greater uncertainty about the future.
Heavenly and Earthly Punishments: Argentina's Troubles Continue
Following the 2020 pandemic, the situation in Argentina didn't initially appear overly pessimistic, according to data from the World Bank. Economic activity rebounded quicker than expected after the pandemic, with GDP growth and recovery in trade and service sectors that suffered due to quarantine restrictions.
However, starting from mid-2022, economic activity began to decline due to strict import controls aimed at accumulating foreign reserves for international debt payments, while inflation rapidly soared. Inflation has surged to 115% over the past 12 months, causing the national currency, the peso, to steadily weaken. In the last five years alone, the peso has depreciated nearly tenfold, dropping from 37.1 pesos to 349.93 pesos per US dollar. In just the last year, the peso has fallen almost 2.5 times in value.
The looming risks of defaulting on IMF debt combined with political uncertainty have intertwined with natural challenges. Massive agricultural areas first experienced frost, followed by drought (which impacted not only crops but also led to a decline in cattle population), and avian flu (prompting the government to suspend poultry exports). These adversities bear resemblance to the most famous biblical calamities, such as hail, locusts, and livestock plagues. Like in the Bible, salvation from further decline is being attributed to miracles.
A record drought in the last 60 years cost the economy $20 billion in agricultural exports (primarily soy, sunflower oil, and wheat). This drought is cited as the primary reason for this year's dreadful slump. "The drought that affected Argentina has an additional burden: it's not widespread globally and therefore doesn't lead to international price hikes, which could benefit the country in terms of price rather than quantity," wrote the publication Ámbito, citing international financial analysts. While there has also been drought in the US and EU this year, as we can see, food prices have remained steady.
Unexpected Risks
Russia's invasion of Ukraine had repercussions for Argentina as well, despite the country not relying on Russian energy exports like Europe. However, due to global conflict, the cost of fuel significantly increased, and Argentina, being an importer, faced heightened currency costs.
The war between major grain exporters gave Argentina an opportunity to earn extra income, but the drought hindered these prospects. As a result, recent data shows that over 40% of the population has fallen below the poverty line, compared to a figure below 25% in 2017. Such widespread impoverishment hasn't been witnessed in Argentina since the 1990s.
Last summer, when the economic crisis was just unfolding, the country saw three changes in economic ministers. Traditional local approaches to maintaining the peso, such as administrative complications for purchasing dollars and import restrictions, failed to work.
In response to the dire situation, there has been an increase in young Argentinians migrating to Europe. However, this trend has been ongoing since the mid-90s.
Chasing the Dollar
Amid constant crises, devaluations, and the printing press running, Argentinians prefer to hold their savings in dollars at home. This is what they call the "mattress bank" or "banco colchon."
The government, on the other hand, limits dollar purchases and imposes additional taxes on imports. Currently, there are around ten different exchange rates in Argentina, depending on who and for what purpose currency is being bought: from the official rate used in foreign trade to the stock market rate and even the parallel or "blue" dollar rate, which crossed the 600 peso mark in August, nearly twice the official rate. For comparison, according to the Central Bank data, the official retail exchange rate was 179 in 2022, 104 in 2021, and 60 pesos per dollar in 2020.
There's also the Malbec rate, designed to boost wine and other agricultural exports, and the Coldplay rate, applied to foreign rock bands performing tours (adding a 30% surcharge to the concert ticket price). In the midst of this, the dollar equivalent of wages (minimum wage at 112,500 pesos) is decreasing daily, causing social tensions to escalate. Seeking international loans only fuels dissatisfaction.
Credit Cycle
Among the recent actions of the current Minister of Economy, Sergio Massa, are extraordinary loans from China, Qatar, and the Inter-American Development Bank for settlements with the International Monetary Fund (IMF).
Following the crisis of the early 2001, Argentina refrained from working with the IMF for a long time. Back then, the cooperation program failed: the government "tied" the peso to the dollar, banks had to freeze deposits, and most of the population lost their savings.
In 2018, the IMF provided Argentina with a record credit of $57 billion, conditioned on implementing economic reforms, reducing budget expenditures, and inflation.
Under the new President, Alberto Fernández, the agreement was revised, and they reached an arrangement to refinance the debt of $44 billion. In essence, they took a new loan to pay off the old one.
Already this year, after lengthy negotiations, the IMF granted Argentina a credit of $7.5 billion in exchange for increasing the central bank's reserves and enhancing fiscal discipline - stricter tax collection and control over government spending.
However, more than half of this money has to be transferred to other creditors by the Ministry of Economy.
Vice President Cristina Kirchner blames the IMF for high inflation: if the peso wasn't falling so rapidly, prices would have risen much more slowly. But the Fund insists on refraining from extensive dollar sales from the central bank reserves to support the peso.
Juan Carlos Giordano, a deputy from the left-wing socialists, dubbed last year's deal with the IMF a "colonial pact of dependence and plunder" and called for halting all payments for foreign debt.
Javier Milei, the winner of the August primaries, went even further and promised to "burn" the Central Bank. Fortunately, he hasn't done so yet.
Photo: The most popular presidential candidate aims to "burn down" the Central Bank and introduce the dollar instead of the peso. Source: TheGaze collage
Scenarios for the Future
Political uncertainty and unpredictable election outcomes are among the risks that experts add to the list, which could negatively affect the country's further development.
"The Argentine economy is always mobilized by three sources of information: economic data, political statements, and the streets (what people say). Individually or simultaneously, all these elements influence the markets... If all three sources turn negative, it will mean that a breach of the agreement with the IMF is imminent, trust in economic and state management will be resolutely undermined, and panic will spread everywhere," depicts a hypothetical economic analyst Luis Ferraro Lara.
The World Bank pays attention to positive signals: the country has made progress in negotiations with the IMF, secured the opportunity to refinance its debts, and strengthen foreign reserves in the short term. They expect that Argentina will continue to stabilize its economy, but how effectively it will be done remains uncertain.
A potential recovery in agriculture could boost foreign exchange inflows. The ongoing Russian-Ukrainian war and the blockade of Black Sea ports could play into Argentina's hands, increasing prices and demand for Argentine food.
Moreover, Argentina possesses significant lithium deposits, one of the most demanded metals globally, used for electric vehicle batteries and gadgets.
JPMorgan Chase Bank expects Argentina to surpass Chile as the second-largest lithium producer in the world by 2027. By 2030, Argentina could supply 16% of the world's lithium, up from 6% in 2021.
Photo: In the northern provinces of Argentina, where the world's largest lithium deposits are concentrated, protests of the indigenous population against the aggressive extraction of this metal are intensifying. Source: Dialogo Chino
However, to tap into all these promising growth opportunities, the country needs to overcome the current crisis and the populist policies of the next president.
And it's not just about overcoming the crisis but also about reconciling with the indigenous population in the north of the country. As this text was being prepared, protests against predatory lithium mining were rampant in the northern provinces of Argentina, where the world's largest lithium deposits are concentrated. Only three out of 38 possible lithium mining projects have been launched in northern Argentina, but the local indigenous population is already actively protesting against environmental pollution and the extensive use of fresh water for extracting valuable lithium compounds.