Roberto Frenkel Warns of Crisis Cycle Stemming from Exchange Rate Lag in Argentina

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Understanding a seasoned economist's historical warning about the dangers of an exchange rate lag is vital to grasping why Argentina's economic stability always seems on the verge of a new crisis, and how current decisions might be replicating past errors.

Roberto Frenkel Warns of Crisis Cycle Stemming from Exchange Rate Lag in Argentina

Economist Roberto Frenkel points out that Argentina's current economic dynamics share similarities with historical patterns of disinflation programs based on an exchange rate lag. Drawing on the experiences of the dictatorships in Argentina and Chile in the 1980s—particularly José Alfredo Martínez de Hoz's plan—Frenkel describes a typical sequence: an initial expansive phase followed by a deterioration of the balance of payments, depletion of reserves, rising interest rates, and finally, a financial crisis demanding a devaluation.

Frenkel highlights the difference between Argentina and Chile during those periods; while Chile faced a balance of payments crisis in 1982, its subsequent devaluation pushed inflation to 30%, far from the hyperinflationary levels suffered by Argentina. This comparison underscores Argentina's difficulty in achieving sustainable disinflation without triggering a massive exchange rate collapse, indicating that exchange rate correction is crucial for accumulating legitimate reserves and sustaining a long-term stabilization program.

"A disinflation program with an exchange rate lag has an initial expansive phase, and then a point is reached where the balance of payments suffers, reserves run out, there's uncertainty, interest rates must be raised... and it ends in a financial balance of payments crisis."

▶ Watch this segment — 1:26:42

Roberto Frenkel Criticizes Milei's Reluctance to Correct Exchange Rate to Avoid Inflation

Economist Roberto Frenkel argues that Javier Milei's government should correct the exchange rate to establish sustainable economic stabilization, but he acknowledges that this would entail significant political cost. Such a correction would lead to an increase in inflation, which the government avoids to protect its primary, and almost sole, political asset: the promise to reduce inflation.

According to Frenkel, the government's current approach, which does not align with global practices of an independent central bank and inflation targets, prioritizes an "Austrian stabilization" without successful historical precedents. This policy, focused on not accelerating inflation despite the technical need for a higher exchange rate, exposes the program's fragility and the difficulty of achieving lasting stability without confronting macroeconomic realities.

"If we weren't talking politics, if it wasn't the only asset the government has... I would say, 'Well, you have to raise the exchange rate, that will increase inflation.'"

▶ Watch this segment — 1:41:22

Fernando Morra Suggests 'Resetting' Milei's Economic Program Due to Lack of Reserves

Economist Fernando Morra evaluated Javier Milei's government economic plan, acknowledging the fiscal adjustment implemented, but criticizing the lack of reserve accumulation and decision-making that failed to lay the groundwork for sustainable disinflation. Morra argues that the program, initiated with a mix of orthodoxy and heterodoxy, did not generate the essential initial conditions—such as a high real exchange rate or sufficient reserves—that had led to success in other stabilization plans in history, like Convertibility or Plan Austral.

Morra suggests that the current economic program needs to be "reset" to aspire to gradual and prolonged disinflation. He warns that the decisions made so far by the government, especially those that did not prioritize reserve accumulation and clarity on the exchange rate regime, could generate more instability instead of contributing to solving Argentina's structural economic problems.

"If you want to start that process [of disinflation], you have to reset the economic program. What isn't the government doing?"

▶ Watch this segment — 1:13:37

Roberto Frenkel States Current Fiscal Balance is Precarious Without Current Account Surplus

Roberto Frenkel argues that, to accumulate "legitimate" international reserves (i.e., not based on debt), Argentina needs to generate a current account surplus and correct its real exchange rate. The economist criticizes the country's current fiscal balance as precarious and unsustainable, as it relies on wage and pension adjustments below inflation, which generates social tensions and is unsustainable in the long term.

Frenkel emphasizes that the only accounting way to have one's own reserves is through a current account surplus. Without this, the reserves accumulated in the Central Bank are, in essence, borrowed. Uncertainty about international financing and the possibility that external interventions, such as that by the U.S. government, will not be repeated, increase the fragility of the Argentine economy in the face of market expectations.

"If you don't have a current account surplus, the reserves you put in the central bank are borrowed."

▶ Watch this segment — 1:36:18

Roberto Frenkel Warns of Fragility in Argentine Economy and Lack of Employment

Economist Roberto Frenkel, known for his criticisms of the Convertibility plan, reiterates that Argentina's current government is in an unsustainable economic situation, describing it as "hanging by a thread," where any shake-up could trigger a crisis. Despite hopes placed on new export sources like oil, gas, and minerals, Frenkel emphasizes that these do not solve the fundamental problem of a lack of job creation for the vast majority of the Argentine population.

Frenkel argues that a stabilization program must not only correct inflation but also ensure that the economy functions normally and generates well-being, not leave "half the country unemployed and sleeping on the street." The prospect of becoming a "Saudi Arabia" without jobs for its people, where production is concentrated in a few extractive sectors, is unviable for a country with large urban centers, which underscores the social and economic fragility of the current model.

"We are hanging by a thread; that is, one little shake and it falls. That fragility is what determines why the country risk premium is so high."

▶ Watch this segment — 1:58:16

Roberto Frenkel Labels Government Plan as Too Costly and Politically Unsustainable

Roberto Frenkel concludes that the government's plan, which seeks to "scrape the bottom of the barrel" to reach a more favorable economic future, is extremely costly for the real economy and lacks political sustainability. This strategy, which involves enduring a severe contraction phase and expectations of future exports, generates great economic and social uncertainty.

Frenkel emphasizes that the current social situation is "dramatic," evidenced by judicial conflicts and tensions in key sectors such as universities and hospitals, resulting from continuous fiscal adjustment. The lack of credibility and the social tension produced by this approach make its durability questionable, despite any intention of achieving a "green year" in the future.

"It is very costly from the point of view of the real economy, it is very costly politically. I also don't know if it is politically sustainable."

▶ Watch this segment — 2:05:05

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