Argentina launches new austerity program, peso slides

Marcos
Brindicci/Reuters

• Argentina reveals new austerity measures aimed at
  reducing the country’s huge budget deficit.
• New measures will include an increase in export tariffs
  for grains such as soybeans, and a halving of the number of
  government agencies.
• The new measures were not well received by investors,
  with the peso falling after their announcement.

Argentina late on Monday revealed a series of new austerity
measures aimed at stopping, or at least slowing, the emerging
crisis around its downtrodden economy.

In recent weeks, Argentina’s peso has plunged to record
lows against the US dollar as investors look to move their money
out of the country. Argentina which has an interest rate of 60%,
one of the highest in the world, and a sky-high budget
deficit.

As part of efforts to reduce that budget deficit — a
condition of a large bailout from the International Monetary Fund
(IMF) — President Mauricio Macri launched the new austerity
measures in Argentina’s capital, Buenos Aires, on Monday.

The austerity measures include an increased export tax
on grains, one of the country’s biggest crops, and a cut to the
number of government ministries. Macri said that “about half” of
all ministries will be closed, but did not specify which
ones.

Argentina is one of the biggest producers of corn,
wheat and raw soybeans in the world, and is the single biggest
exporter of soy meal and soy oil, two crucial commodities in the
rearing of livestock.

Monday’s measures come as the IMF, which has extended Argentina
the largest credit line in its history, considers speeding up
bailout payments to the country. Argentine President Mauricio
Macri said last week that he had requested IMF do
so in order to “eliminate any
uncertainty that was created before the worsening of the
international outlook.” 

As part of the three-year standby agreement, the government has
received $15 billion and is due to get an additional $3 billion
next month. Nicolas Dujovne, Argentina’s finance
minister, is flying to Washington, D.C., on Tuesday for talks
with IMF chief Christine Lagarde about the possible acceleration
of the rescue package, which is worth a maximum of $50
billion.

Unfortunately for the Argentinian government, the new
austerity plans were not received as hoped in international
markets, and the peso slid on the news.

It has since recovered a little, but still remains almost
25% lower over the last week, as the chart below shows (the most
common pairing of the currency is against the US dollar, which
rises as the peso falls):

Markets Insider

Paul Donovan, chief economist at UBS Wealth Management
summed up the lukewarm response to the new measures in a morning
email. “Argentina’s government revealed an austerity plan, with
the aim of restoring investor confidence,” he wrote to
clients.

“The Argentine peso weakened on the news, suggesting that
there may be some way to go before confidence is
restored.” 

The rating agency Moody’s last week cut its growth forecast for
Argentina, citing the ballooning debt burden and a weakening
peso. It estimates that GDP will contract by 1% next year,
compared with previous expectations for a 3%
expansion.