Argentina’s economic entropy

With the highest inflation in 32 years, Massa faces growing political challenges

The second law of thermodynamics states that entropy, a measure of disorder, tends to increase in a closed system. Ergo, a system in chaos is likely to become more chaotic with time. 

Argentina’s economy is an example of this. 

The steady drizzle of dreary economic news that had become the norm intensified into a downpour this week. 

The storm began last Friday, when a US district court found Argentina liable to pay upwards of US$16 billion in penalties and interest stemming from its 2012 expropriation of oil and gas company YPF.

The ruling was a victory for Burford Capital, which had purchased the trial rights from two former YPF shareholders. The litigation funder argued that Argentina had not made the minority stakeholders, defunct investment firms Petersen and Eton Park, a tender offer when it expropriated the company in 2012. 

Read more on the complicated court case here.

Argentina is locked out of international credit markets. Its net foreign exchange reserves are, at best, US$4.5 billion in the red, and Buenos Aires has already turned over nearly all of its couch cushions, scraping together funds to repay its US$45 billion IMF debt. On the heels of an historic drought that pummeled the country’s coffers, it remains a mystery where the country will find an extra US$16 billion.

Beyond the staggering sum for which Argentina is now on the hook, the court’s decision is a political headache for Massa. A signature policy of Vice President Fernández de Kirchner’s presidency, YPF’s expropriation was orchestrated rather audaciously by Axel Kicillof, one of the VP’s closest allies and the current governor of Buenos Aires Province. As evidence of Argentina’s culpability, the US judge cited a statement Kicillof made to Congress in 2012. Only “morons,” he asserted, would respect YPF’s bylaws during the nationalization process, questioning the high costs associated with doing so.

Fernández de Kirchner and her allies have kept relatively quiet since August. In Argentina’s polarized society, their reputation, should it be tied to Massa, could harm the economy minister at the polls. As he battles Patricia Bullrich for the political center, Massa has taken pains to distance himself from the more hardline factions of the ruling Union por la Patria (UxP) coalition. 

In the immediate term (and really only in the immediate term), the ruling is a gift for the opposition Juntos por el Cambio (JxC) bloc. Patricia Bullrich’s camp has already capitalized on it to paint the Peronists as irresponsible economic stewards. Massa will now have to work even harder to convince moderate, Kirchner-skeptical voters that he operates independently of the vice president. At the same time, he cannot alienate the Peronist base, which is largely loyal to Fernández de Kirchner. 

Days after the court’s decision, government statistics agency INDEC reported inflation for August of 12.4%. The figure marks the sharpest monthly rise in consumer prices in 32 years. Annual inflation stands at an eye-watering 124%. 

Massa now finds himself wedged even deeper between a rock and hard place. He is balancing complying with external debt obligations, principally the IMF debt deal, with averting the complete implosion of millions of Argentines’ purchasing power (at least before October).  

Hanging in the balance are his political future and the economic solvency of his country. With respect to the former, things are looking increasingly bleak (albeit not impossible). 

Mass frustration with the state of Argentina’s economy stands to cost UxP at the polls. Indeed, it already has. Argentina’s third most populous province, Santa Fe, held local elections this past weekend that were viewed as a bellwether for October’s national vote. 

For the Peronists, who have governed Santa Fe since 2019, the result was discouraging at best. The JxC-backed candidate took 58% of the vote to his Peronist rival’s 31%. The defeat is a concerning sign for Union por la Patria that many voters have lost faith in the coalition’s economic management. 

Undeterred by the deluge of bad news, Massa this week raised the income tax threshold to AR$1.7 million per month. Most of Argentina’s formal workforce had already been exempt; only 890,000 people were paying income taxes before Massa introduced the measure. Now, just 90,000 of the roughly 10 million on-the-books workers in the country –– less than 1% –– will see their incomes taxed next month. 

Massa followed the exemption with another big-ticket support measure. Most of the country’s public and private workers, pensioners, and state aid recipients will receive VAT refunds for basic goods. Coupled with a raft of economic support measures unveiled this month, the move further stretches the country’s strained (put generously) finances. 

Higher government spending and lower tax revenues will make it difficult, if not impossible, for the country to keep its promises to the IMF to reduce the fiscal deficit and control money printing. Should it run too far afoul of the agreement, Argentina could lose its primary dollar lifeline.

All the while, the economy minister has to face cheeky taunts from presidential candidate Javier Milei, who is still reveling in his surprise triumph during August’s primary elections. 

Once the long shot, Milei is now the tentative favorite going into October. His bombastic rhetoric and no-holds-barred campaign style carried him through the primaries. But, as I discussed last week, the libertarian is now looking to widen his support base by winning more mainstream allies. 

Controversies aside, core elements of his policy platform, including his flagship dollarization scheme, face stiff opposition from Argentina’s more mainstream political and economic actors. Earlier this week, 170 of Argentina’s most influential economic analysts and policymakers signed a letter warning against dollarization, which they described as a “mirage”.

In a bid to build confidence in his policy acumen, Milei has in recent weeks met with a number of major union leaders and high-profile business leaders, members of the “caste” he regularly attacks. 
He has also openly courted former President Mauricio Macri. While the JxC founder had for weeks tacitly entertained a collaboration with Milei, he voiced his support this week for the coalition’s candidate, Patricia Bullrich, his political protégée. The public backing comes at a crucial moment for Bullrich, who is foundering in opinion polls amid concerns that her policy platform is more smoke than substance.


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