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Argentina’s unknown destination

There’s an old joke about a tourist approaching a local to ask for directions: The local considers, sucks on his teeth for a while and replies “I wouldn’t start off from here if I were you”.

Argentina under president Mauricio Macri feels a little like that. The challenge his administration has had to overcome is one for the economic textbooks. But today, following a collapse in international investors’ confidence, that joke feels even more apposite.

Argentina’s inflation rate is around 25%, and it has no chance of hitting its 15% target for the end of the year. Inflation was already becoming unanchored before the peso fell to 25 to the dollar, and now there are pass-through effects to come.

Meanwhile, interest rates of 40% sit astride a slowing economy. Investment is still to show up in any meaningful way and, with these rates, inflation and a stricken currency, the outlook for the domestic and international capital flows needed to drive GDP growth isn’t good.

Tortuously slow

The so-far tortuously slow fiscal adjustment – just about do-able with 3%-plus GDP growth – will have to be sped up. Macri was desperate to avoid shock treatment in a bid to preserve his political capital. That equation, at least, was working. But now the IMF is back to haunt a country traumatized by its last intervention.

The political fallout from that and the necessary pain from fiscal tightening – cutting subsidies, reducing provincial spending and limiting public wages and pensions at below-inflation rates – creates real risk to his re-election bid next year.

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