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CAPITAL MARKETS

Argentina leaves markets worried about ability to grow

The country’s gradualist approach to adjusting its fiscal deficit was always balanced on a knife-edge. The markets were willing to finance the experiment because of their faith in the economic team. But a recent unforced error has made the path to success even more precarious.

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"It’s like chemotherapy. If you have it all at once, you are going to kill the patient. You need to find a dose that won’t kill the patient.”

The patient being discussed by a senior capital markets banker in New York is the Argentine economy. The dispute that still rages domestically and internationally is about president Mauricio Macri’s medicine. How large should the dose of adjustment be? And just how quickly should the government implement its reforms

Many abroad and in Argentina are in a favour of upping the speed at which the medicine is administered, especially in light of Macri’s success in last October’s mid-term elections.

“I think Macri needs to stop the gradualism policy,” says Exotix’s Rafael Elias. “It got him through the mid-terms and he [still] has a very high popularity rating. But the country is spending more than it is making and the debt is growing exponentially.”

To keep the adjustment moving forward at a viable tempo, the government needs to keep growth above 3%. That needs real investment, both local capex and foreign direct investment, rather than large capital flows that heat up the exchange rate and have been the financial feature to date.