Austerity leads to credit crunch in Argentina.
Figures published today by the Argentine Central Bank show that the country's credit market shrank by 0.7% in first quarter of 2016 from the same time a year ago - a sharp contraction of 25% in real terms considering that inflation has risen to around 33% in the same period.
The figure is in stark contrast to 2015, when credit in Argentina expanded by 37% while prices did so by about 25%. Growth in every major type of credit slowed: business loans, which had grown by 40% in 2015, declined by 6.6% in the first quarter; mortgage loans (which never fully recovered from the 2002 crisis) grew by 15% in 2015 but declined 1% in the first quarter; and revolving credit, which helped fuel record sales of big ticket items, rose 57% in 2015 but declined 5% in the first quarter.
The sudden credit crunch in Argentina coincides with monetarist policy adopted by the Central Bank since President Mauricio Macri took office four months ago. His Central Bank president, Federico Sturzenegger, has made curbing growth in the monetary base a policy centerpiece in keeping with Macri's campaign promise to control inflation (which had averaged 25% under his predecessor).
Their own 40% devaluation in December, however, later forced Sturzenegger to double central bank interest rates to 38% to stop a run on the peso in February. The hike in interest rates calmed the currency crisis; but has strangled the country's already tight credit market.
Access to credit was further dampened by the Macri team's decision to limit access to the Productive Investment Line for businesses and to the PROCREAR low-interest mortgage program, which had issued over 200,000 mortgages to new homeowners since it was enacted by former President Cristina Fernández de Kirchner in 2012. Fees and commissions also weighed on credit after lending regulations were dismantled as part of the new team's laissez faire approach.
The credit crunch has exacerbated a sharp recession first triggered by the December devaluation and the sudden jump in consumer prices that followed. While Macri has refused to release monthly economic data since he took office, the estimated 141,000 layoffs and 28% deterioration in consumer confidence since November indicate that real Argentine GDP may decline for the first time since 2002.
Amid an increasingly negative business outlook, the increased foreign investment the Macri administration committed itself to incentivizing has failed to materialize. Alfredo Cornide of the Chamber of Medium Enterprises (CAME) believes the country has entered a vicious circle in which higher unemployment means lower consumption, which in turn prompt companies to dismiss even more staff.
Juan Carlos Sacco of the Argentine Industrial Union (UIA) agrees, estimating that the combined recession with rate hikes will cause between 100,000 and 200,000 layoffs in the manufacturing sector alone. Argentine firms could be especially hard hit, Sacco pointed out, since the local affiliates or partners of foreign manufacturers can usually access credit from their parent companies.
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