SINCE 2015, Argentina’s economy under the leadership of President Mauricio Macri has been going through a major structural reform with a view to revive the economy by boosting growth and confidence of its citizens and investors alike.
Expectations were high when he assumed power as he was seen to be business-friendly, and supported market mechanism and liberalisation.
Almost three years on, some results can be seen, such as the reduction of the deficit level as the gradual abolishment of subsidy and the pension reform initiative have been taking place. But, overall, things are moving at a snail’s pace, probably due to the many delicate issues that need to be confronted as any tweaks on economic programmes will have repercussions on the social and political dimensions of their society.
Argentina’s economy is unique. Simon Kuznets, a Nobel Laureate in economics, once quipped that there were four types of countries: the developed, the underdeveloped, Japan and Argentina.
So it is no surprise that in the field of development economics, Argentina seems to be one of the countries that are most studied in the literature.
It is like a laboratory for students of economics to gather data and conduct experiments. Argentina has been experiencing economic problems in the past, and the latest one was in 2001, though a short period of economic stability was felt in 2003 upuntil 2007.
In fact, they managed to settle their debt to the International Monetary Fund (IMF) in 2007.
But when the global economic recession struck the world in 2008, the economy of Argentina was again back in a state of volatility. Argentina’s then president, Cristina Fernandez de Kirchner, had undertaken bold measures to jumpstart the economy, such as increasing public spending, nationalising companies, subsidising daily life expenses and, most importantly, controlling the exchange rate against the US dollar. But the intended effect seems to be far from becoming a reality.
Generally, Argentines are still struggling with the increase in the cost of living, the high inflation rate of 30 per cent, and have become poorer as wages have been stagnant for a long period of time.
And when Macri took over the helm, he vowed to address the economic challenges at hand. But it appears that things have gone wrong somewhere when in May this year, he turned to IMF for a US$50 billion (RM207 billion) loan, of which, according to him, was meant to boost the country’s ailing reserves.
Eventually, all hell broke loose when a few weeks ago, on a YouTube video, he was asking IMF to speed up the release of the remainder of the loan to shore up next year’s budget.
As a result, its currency, the peso, has fallen to a historic low by almost 16 per cent in the two-day sell-off and subsequently has forced the central bank to raise interest rates to the world’s highest of 60 per cent.
The speech, which was intended to calm market nerves, has triggered the acceleration of the emerging market sell-off trend beginning with the recent Turkish lira crisis. Undeniably, investors worldwide are deeply concerned with the situation in the emerging markets. Other factors that have exaggerated the situation in Argentina are the strengthening dollar, the ongoing US-China trade war, the expectations of the rise in oil prices and US interest rates. All of these have sent shudders across the emerging markets. This can be seen in the FTSE Emerging Index of emerging market equities, which has fallen by 1.3 per cent, one of the biggest declines in recent times.
Other emerging markets have felt the impact, though in different degrees. At the time of writing, Indonesia’s rupiah has plunged to the 1997/98 Asian financial crisis level, while the Philippine peso has fallen by 6.8 per cent. As for Malaysia, the growth momentum has moderated from 5.4 per cent in the first quarter of 2018 to 4.5 per cent in the second quarter of this year. The ringgit has depreciated to RM4.14 against the US dollar.
While overall the Malaysian economy appears to be resilient to weather this situation, more significant steps must be taken to minimise its impact in the medium term. Hence, the move by Bank Negara Malaysia to hold key interest rates at 3.5 per cent is a step in the right direction. There are changes made in terms of measures to ease foreign exchange trading rules, but it remains to be seen how effective these measures are.
But I believe the country urgently needs clarity in terms of policy direction for the Malaysian economy to move forward.
DR IRWAN SHAH ZAINAL ABIDIN
Associate professor of Economics, Universiti Utara Malaysia; director, Asian Research Institute of Banking and Finance, Universiti Utara Malaysia