A key electoral year begins in the structural sphere and unanchored in the situation

Economy Minister Sergio Massa and President Alberto Fernández at the Casa Rosada

I start with a short story.

A climber slips on the mountain and falls down a precipice a thousand meters deep. In the fall, he gets caught on a branch that juts out of the hillside and dangles. Desperate, faced with such a dramatic situation, he looks up and prays: “Please, God, help me.” Suddenly, a voice is heard from heaven telling him: “If you have faith, let go.” The man looks into the depth of the valley, and yells again “Is there anyone else up there?”

An electoral year is starting in Argentina. And, as is becoming clear in these days of institutional debacle, it is not just another electoral process.

And just like in a large part of the planet, Argentine society today feels like the mountain climber in the story, clinging to a branch, hanging from the precipice and doubting its faith in the political class from which it will have to choose the new (or renew the current) leadership.

But the underlying problem is not only the crisis of the political leadership, at the end of the day there are plenty of honest and capable people in the country, in a position to take over.

The most complex issue is that these new leaderships are obliged, in order to be successful, to promote institutional reforms that make it possible to generate credible incentives, rewards and punishments over time, so that the business and union elite leaders, the true protagonists of the country’s growth, finally assume the transformative role that corresponds to them.

All this in a scenario where an attempt at regime change such as the one that is needed today seems to be blocked by the “right of veto” possessed by precisely those who have to cede, at least in part, their current status.

So far the great structural problem in which we are immersed and which is combined with a very complex pre-electoral situation.

And this complex situation is dominated, as all the opinion polls show, by the concern generated by an inflation rate that flirts, dangerously, with 100% per year.

In this sense, the Government has set itself the objective of “reducing the inflation rate by one percentage point every 75 days” (textual). This would lead, in a linear projection, to the inflation rate for the month of October, prior to the eventual second round of elections, standing at 1.1% per month, starting from the 5.1% of last December.

Of course I am exaggerating the argument, simply so that the curious thing about the proposed “inflation target” is understood, but the truth is that Minister Sergio Massa, perhaps because he is a lawyer, has violated one of the basic recommendations of the WHO for professional economists who make projections: “Never give a number and a date, simultaneously.”

I take seriously. Any self-respecting disinflation plan needs to define at least one nominal anchor.

The Government has chosen, as nominal anchors, the de-indexation of the increase in the official exchange rate. The price agreements in some certain items –in exchange for satisfying, at the official price, the demand for dollars from the companies that are part of the program-. Adding also the attempt for the most important unions to agree on salary increases, during the first semester, at the inflation rate forecast in the budget -60% per year- under the review commitment by mid-year.

Meeting to freeze the prices of clothing in the Ministry of Domestic Trade

In other words, several anchors, but which, in principle, appear to be quite weak to meet the relatively ambitious objective set.

Increasing the daily variation of the price of the official dollar below the expected devaluation rate is a common temptation that governments that want to lower the inflation rate fall into, given that, obviously, the price of the dollar is a key input in the price formation in our country.

However, for such an anchor to work credibly, the price of the official exchange rate does not have to be grossly behind, and/or the Central Bank have sufficient reserves to support it.

As you know, none of these alternatives is available today.

The real exchange rate index, calculated by the Central Bank, based on the evolution of the price of the dollar and the inflation rates of Argentina and the United States, shows a 25% drop, compared to the end of 2019.

On the other hand, the stock of net reserves of the Central Bank is very low and the future is negative, taking into account the estimated drop in income from the export of agribusiness, given the lower supply caused by the drought. In this context, added to the restrictions and the rationing of dollars to importers, many prices in the economy are beginning to be governed more by the price of free dollars than by the value of the official dollar. And this price depends on the issuance of pesos and the fall in the demand for money that is precisely generated by inflation. And like the issuance of pesos, either to indirectly finance the Treasury, or to buy internal debt bonds that the private sector is not willing to renew, beyond the very short term, or to buy “soybean dollars” or those that are invented this year, either to pay the interest on the leliqs that are not fully absorbed, define a macroeconomic inflation that “travels” at a rate of 80% per year, while the demand for money continues to fall, the probability that the gap will compress enough and the official or free exchange rates, function as an anchor, is very low, if not zero.

As for the price agreements, these do not cover all prices in the economy and, again, are subject to the supply of dollars promised by the government. Promise that is not known, for sure if it will be able to fulfill.

Lastly, the salary agreements with annual adjustments of 60% and semi-annual review, if indeed they could be generalized, hardly serve as an anchor in an election year where, as in the last quarter of last year, the government will end up encouraging bonuses, and readjustments that give the illusion of real salary recovery, at the time of voting.

Central Bank of the Argentine Republic

To this panorama we must add the increases already scheduled in regulated prices.

For now, the only powerful anchor that the inflation rate is having is the drought that forces the cows to be sold and lowers the price of meat and the brake on economic activity itself, derived from the lack of sufficient dollars for normal production. .

Paradoxically, if, despite everything, the inflation rate were slowed down, the fiscal situation would worsen, since expenses are, to some extent, indexed to past inflation, while revenues are mainly adjusted for current inflation. And this fiscal deterioration would also hit the monetary situation, conspiring against a lasting stabilization throughout the year and would also make noise in the light agreement with the IMF.

As can be seen, achieving an electoral year with a drop in the inflation rate and a higher level of activity seems to be more the task of Tom Cruise than of Minister Massa.

With all this, the most likely scenario is inflation similar to that of 2022 and a lower level of activity. Although zero probability cannot be assigned to a more traumatic scenario.

Going back to the structural issue at the beginning of this note, the situation seems to be raising the chances that the next leadership to be chosen will be among the group of opposition candidates.

Argentine society then, knowing that, fortunately, “there is no one else up there” as an alternative, will have to accept that, with justified doubts and weakened faith, the only way left is to “let go of the branch” and try.

Keep reading:

Alberto Fernández consolidates Chapadmalal as the headquarters of the Buenos Aires campaign and raises Macri to the electoral ringTrial to the Court: the Government aggravates the political conflict, complicates the economic front and opens internal

---

Source

---