Wednesday, January 29, 2014

Land of Messi and Peronism discovers limits of populism

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29 Jan 2014 | Tony Leon | Original Publication:  BDlive

Argentina’s defiance of the economic laws of gravity invited its isolation from world financial markets, hastened disinvestment and provoked civil unrest, writes Tony Leon

IN LATE September 2012, on my last day in residence as South African ambassador to Argentina, I took a farewell stroll down the tree-lined boulevards of Recoleta, a suburb of Buenos Aires. I noticed the empty display windows in one of its up-market emporiums.

Argentinian President Cristina Fernandez
Fashion retailer Louis Vuitton — a favourite of Cristina Fernandez de Kirchner, the handbag-wielding president of Argentina — had just announced it was closing its doors. Its exit from the country, following fast in the departure of other international luxury brands, much loved by local fashion aficionados, was the latest scene, back then, of what I dubbed the long-playing melodrama: the Crisis of Cristinanomics.

Sixteen months ago, and not for the first time either, Argentina was heading over an economic cliff as the population raced to dump pesos for dollars and a zealous government fought back through draconian exchange controls, bullying tax-intrusive measures, manipulating economic data and import-suppression measures.

In an article I wrote on my return here for the Financial Times, I noted an eerie parallel between Argentina then and the apartheid government at its nadir in the 1980s.

Although, of course, Argentina had none of the racial policies then in place in South Africa that isolated this country, its stubborn pursuit of eccentric economic policies suggested some parallels. Its defiance of the economic laws of gravity invited its isolation from world financial markets, led to a dual currency in which arbitrage and round-tripping — not investment — became the names of the game, all of which hastened disinvestment and provoked civil unrest.

I was also struck how South Africa back then and Argentina more recently were increasingly detached from the world and determined to defy it, either because of racially repugnant policies or outlier economics respectively.

In the intervening period since my return, the Argentine government managed — despite political defeats in Congress, the ill health of its president and continuing investor and consumer unhappiness — to more or less avert total meltdown. In the same period, underlying the disconnect between its fantastic human capital and its poor governance, it gave to the world some outsize individuals: the first non-European pontiff, Pope Francis, football supremo Lionel Messi and the Queen Consort of the Netherlands, Princess Maxima.

Two factors helped pull Argentina back from the cliff in 2012, which strike some uncomfortable chords with South Africa today: surging growth in China (Argentina provides it with 40% of its soya bean imports) and the rapid printing of dollars by the US Federal Reserve through its programme of quantitative easing. Higher, though risky, Argentine yields provided a carry interest market for the adventurous. But with both those trends now reversing, and investors exiting emerging markets with great haste, Argentina took a huge hit. It was not alone, as the battered rand, the shrinking Turkish lira and the diminishing Brazilian real reflected.

But, on a swelteringly hot day last Thursday, Argentina led the field with the dubious distinction of posting the largest fall in a single day of any (emerging or other) currency, as its peso fell an astronomical 15%. Over the week, it fell about 18%, its sharpest descent since the country posted the biggest single sovereign debt default back in 2002.

And that default, with its consequential debt obligations, fuelled the need to preserve dollars, which in turn led to drastic remedies, ranging from "haircuts" for foreign bond holders, nationalisation of foreign companies without agreed compensation, extreme protectionism to deter imports, fudged or manipulated financial statistics, and associated maladies. But this in turn led to the country being excluded from vital foreign credit markets, and incurring the extreme displeasure of the International Monetary Fund.

Broken air-conditioners and lifts in the capital city hardly helped the mood last Thursday, which was well captured in the headline of the fiercely independent Buenos Aires Herald: "Official Exchange Rate: $8.10; Temperature 34 degrees; Unofficial Exchange Rate $12.10, real temperature, with humidity, 46 degrees!"

That headline, aside from reflecting the uncomfortable weather, was shorthand for another phenomenon well remembered here from the days of the "Rubicon rand", the uneasy existence of two parallel local currencies. In Argentina’s case, it is more acute. Its "blue" or black-market rate of exchange, always a more realistic reflection of the currency’s worth, traded at about a 40% differential from the official rate. The latter was propped up by the central bank’s determination to buy up dollars to prop up the country’s currency. But as a particular nemesis of Argentina, former British prime minister Margaret Thatcher, once famously observed: "You can’t buck the markets."

And the proximate reason for the peso’s vertiginous collapse was the central bank’s announcement that it would stop intervening in the market to defend the currency (a wise policy long practised over here). Necessity was the mother of virtue in Buenos Aires: its foreign reserves had drastically diminished due to the triple headwinds of central bank dollar purchasing, tapering by the Federal Reserve and stagnant commodity prices for its world acclaimed agri-exports.

But another realistic and historic spectre hangs over Argentina: the fear and reality of hyperinflation. With the government hitting the printing presses to fund its populist vote-winning social handouts and subsidies, inflation is reckoned to be about 28%, although the official, and discredited, figure places it at about a third of that. Dollar retention was thus a key reason to prop up the local currency. But, by the weekend, when the government reversed course and in effect allowed the currency to devalue, the big question in Buenos Aires remained unanswered: as John Paul Rathbone of the Financial Times put it: "If the flight to dollars is being caused by high inflation, cutting inflation means also cutting public spending and the money-printing used to finance it — which Fernandez’s left of centre government is loath to do."

Simply put, a crisis is an excellent moment to make deep structural reforms rather than ad-hoc Band-Aid measures, which the market soon discounts. Peronism is the vote-winning brand of Argentine populism and politics, but it has many doppelgangers elsewhere.

For example, Economic Freedom Fighters "commander" Julius Malema has borrowed both his beret and what passes as his economic policy from Venezuela’s late president, Hugo Chávez. Argentina in turn practices a sort of Chávez-lite policy, which is slightly less economically radical but minus the sea of oil on which Venezuela sits. Both provide a cautionary lesson in South Africa to the threadbare and impoverishing nature of populist economics in practice.

I asked Buenos Aires resident and the former head of retail and business banking at Standard Bank of Argentina (now ICBC), Johan Roets, for some local parallels. "A relatively small economy (Argentina and South Africa have roughly the same weight in the world) cannot control its own currency," he said. "Argentina’s leaders today are populists rather than leaders. Populism might help you get elected but eventually you fall off the cliff. What happened last week in Buenos Aires was simply the acceleration of a very long process of mismanagement."

A sombre note from the other side of the South Atlantic, or perhaps a home thought from abroad.
Leon is the author of The Accidental Ambassador (Pan Macmillan). Follow him on Twitter: @TonyLeonSA OR on Facebook:

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