BUENOS AIRES (Reuters) – Argentine President Mauricio Macri on Wednesday unveiled a package of welfare subsidies and tax cuts for lower-income workers to lessen the pain of an economic crisis months before elections, but his announcement failed to halt the peso currency’s collapse.
Macri’s announcement, which marked a major climbdown in his IMF-backed efforts to balance Argentina’s budget, came after his leftist rival Alberto Fernandez romped to a landslide victory in Sunday’s primary election by drawing on popular anger at painful austerity measures.
In the wake of Sunday’s poll, Macri had promised measures to turn around his 15 point defeat, which sent Argentina’s currency, stock market and bonds into a tailspin amid fears of a return to capital controls and a debt restructuring.
However, investors appeared unconvinced on Wednesday that Macri’s late change of direction could prevent the return of the left to power in Latin America’s third-largest economy.
The peso closed 7.1% weaker on Wednesday to reach 60.2 per U.S. dollar, having lost a quarter of its value so far this week in a market meltdown unseen in Argentina since the country’s 2001 debt default.
Argentina’s Merval stock index has fallen a staggering 34.47% in three days.
Macri promised on Wednesday he would raise the minimum wage, temporarily freeze gasoline prices and increase the income tax bracket floor by 20%.
The new measures, which would cost about $678 million, would allow a tax cut for two million workers worth some 2,000 pesos ($33) per month per person, the government said.
“The measures I take and that I am going to share with you now are because I listened to you,” Macri said in a video statement.
It was a far cry from the start of his presidency in 2015 when Macri slashed public subsidies in an effort to right the economy after campaigning against the free-spending ways of his leftist predecessor Cristina Fernandez de Kirchner, who is now running as the vice-presidential candidate for the opposition.
Macri, a member of one of Argentina’s wealthiest families, had promised voters to kick-start the commodities-rich economy via a liberalization wave but four years later inflation is at 55% and the country is in recession.
In the eyes of many Argentines, Wednesday’s announcement was too little, too late.
Brenda Scala, 25, said the 2,000-peso estimated savings through Macri’s new cuts would barely cover the cost of an electricity bill.
“It’s almost nothing. The truth is people are struggling to get to the end of the month. And the gas price freeze – it took four years? Two thousand pesos is not enough to win votes,” Scala said.
Argentina’s central bank sold $248 million from its reserves to try to steady the peso by Wednesday afternoon, bringing its total sales in reserve dollars to $503 million this week.
The bank has about $66 billion in reserves, of which about $20 billion are free resources that it can used to pay debt and stabilize the peso, according to an Argentine government official.
Debt payments for the remainder of 2019 are estimated between $5 billion to $10 billion, depending on Argentina’s ability to roll over domestic Treasury bills, leaving a thin margin to intervene in the foreign exchange market.
There is an additional $27 billion in maturities in 2020, according to government data.
Fernandez, who had said on Monday that Macri was to blame for the market’s meltdown by promising too much to investors, he warned that Macri’s government could run out of foreign currency reserves if it sought to slow the peso’s fall.
“Because of the seriousness of the situation, the risk is that we end up without reserves and that the Fund ends up turning its back on us,” the presidential candidate told El Destape Radio.
Fernandez has said he wants to renegotiate the terms of Argentina’s $57-billion standby agreement with the International Monetary Fund, saying budgetary cuts are too arduous, fuelling fears of a debt restructuring.
Argentina’s century bond fell a further 4 points on the day to trade just under 46 cents on the dollar, a record low, according to MarketAxess data. The January 2028 bond was also trading at record lows under 46 cents.
Investors have said that prices near 50 cents indicate a market expectation of a debt restructuring.
Macri said on Twitter he had carried out a “good and long” conversation with his center-left rival, who had expressed willingness to keep markets calm in case of an eventual handover of power.
Speaking after the call, Fernandez struck a more conciliatory tone in a news conference, saying that his economic agenda did not contemplate a debt default or ignoring the obligations of the country.
The market meltdown is likely to deal a heavy blow to Argentina’s faltering economy. Sales of goods from cars to food and beauty products have slowed in recent days, as suppliers hold back shipments while trying to calculate how the weaker peso will affect consumer prices.
Macri’s best hope of retaining the presidency is to reach a second round of voting after October’s general election, but investors see that as a long shot, said Ilya Gofshteyn, New York-based senior emerging markets strategist at Standard Chartered Bank.
A candidate needs at least 45% of the vote, or 40% and a difference of 10 percentage points over the second-place runner, in order to win the presidency outright.
“The Macri administration underestimated the extent of the economic hardship facing Argentine voters,” Gofshteyn said.
For Adrian Lopez, a 47-year-old office manager, the relief plan could represent an opportunity for Macri to win back some support among undecided voters.
“He should have done these measures before, but I think there are a lot of people who decide their vote at the last- minute, and well, we are in the last minute now,” Lopez said.
Reporting by Cassandra Garrison and Nicolas Misculin; additional reporting by Miguel Lo Bianco, Gabriel Burin, Hugh Bronstein, Walter Bianchi and Hernan Nessi; Tom Arnold in London; Rodrigo Campos in New York; Editing by Daniel Flynn and Alistair Bell