Posted by on September 20, 2019 7:42 pm
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By Agustín Etchebarne, Director, Libertad y Progresso


Originally published in Ambito Financiero. Courtesy of Libertad y Progresso.



The uncertainty generated by the possible triumph of the Peronist Fernández-Fernández ticket in Argentina is big and impossible to dismiss at the moment. Naturally, the markets reacted with a 30% devaluation and a great loss of the value of the companies and bonds that exceeds 50% in some cases.



This huge destruction of wealth in a single day has almost no precedent in world history, except in case of war. Many people do not understand how wealth can be destroyed so quickly, or think that this is not the real economy, that it is just something “financial,” as if finance were independent of the real economy. They do not understand that the value of companies does not depend on machines, properties and buildings, but rather depends on the flow of future earnings (net of taxes) discounted at an interest rate that includes country-related risk. Inevitably, along with the fall in the value of companies, investments and real wages fall. Everyone loses.



Those who believe that high inflation and high interest rates favor the financial market are wrong. In countries with one-digit inflation and very low interest rates, credit is expanded, and industry, commerce and services improve: everyone wins. That is why a Chilean or Peruvian private bank is worth seven times more than any Argentine private bank.



The truth is that on Sunday we went from the possibility of escaping the recession to a serious crisis with capital outflows, a dramatic brake on investments, an acceleration of inflation, a fall in the demand for money and problems in some payment chains. This occurs in a country that has already suffered five recessions in 10 years, with people tired, 50% of children in poverty,  high inflation and unemployment. In this context, government measures are nothing more than bandaids. And there are still 74 days left before the first electoral round, and another 45 days to deliver the result — an eternity.



So it is likely that the next government will take power amid an economic crisis, and it is logical to assume that it is headed by Alberto Fernández (after the result of the previous national primary in August the other scenario is unlikely). Thus, Alberto Fernández will have two options on the basis that it would assume in a context where it will not have enough money to distribute, as happened with the Kirchners.



An alternative is to follow the teachings of Ernesto Laclau: in that case Alberto Fernández will choose a scapegoat, typically the IMF, neoliberals, banks, etc. They would receive all the blame for the ills that Argentines will suffer — the increase in poverty, the fall in economic activity, inflation and other calamities. That would allow him to win the favor of a part of the population that would see him as the defending leader and channel their anger into supporting him. The government implements a planned economy program with price and salary controls, stocks or differential exchange rates, a tangle of taxes, withholdings and subsidies that would give enormous power to the Minister of Economy and the Secretary of Commerce, in effect to decide who wins and who loses. That is, a mixture of everything bad that has been done in Argentina so many times.



In that case, we are likely to observe a very deep fall, with a high probability of reaching a default (which the markets already show above 75%). The crisis in that case can be very big because we start from a worse point than De la Rúa had in 2001: the debt is higher (85% of GDP vs. 54% back then); poverty is greater, today close to a third of the population, versus at that time less than a quarter; Argentina’s institutional quality is 60 places lower in the Institutional Quality index prepared by Martín Krause; and we are in position 148 of economic freedoms of the Heritage Foundation, compared with the position 20 that we had with De la Rúa.



In addition, we start from a very high inflation and the number of people living of the state, which were 7 million in 2001, today exceed 21 million people, so public spending has increased by 15 points of GDP; and we have 163 taxes, with the highest tax burden in all of the Americas. The crisis would be not only economic, but also social and political, with a great risk that the dreaded “they should resign” will reappear. Maintaining power could once again require commit a high dose of repression and crushing civil institutions.



The second alternative is the one that toured Australia, New Zealand, and was on display Alan García and Fujimori in Peru. That is to say, a leftist government assumes power but then decides on a program of structural reforms that surprises the world. If so, it could, with justice, pass the blame for the deficiencies that the population will suffer during the first year of management to the previous governments. And in the meantime, ratify the free trade agreement between Mercosur-EU; face the reform of the State and taxes; deregulation; a monetary reform that replaces the peso; and rely on free markets. Argentina could finally start the road to development. The advantage is that when this is done by a leftist government, not only does it more easily win the support of the population, but it is naturally supported by the opposition and it is more likely that the road will be maintained for decades with a faster increase in investments and higher growth rates .



I hope you understand that there is another path that would lead Argentina to progress and Fernández to the status of statesman. The market for now believes that it will choose something similar to the first alternative. It does not help of course, that the candidate asks for the release of former president Lula imprisoned for corruption.