No anchors in sight in a world in turmoil
Crushing the program with the IMF
Execution risk
Fiscal goal
Reserves goal
Monetary goal
Transition risk
Baseline scenario 2022
Effects of the exchange rate gap
Exchange gap, Reserves and In-flation.
Exchange rate gap and income distribution
These dynamics are exacerbated by the reminiscence of the pandemic in the form of the new closures in China’s production lines and the still high freight costs left by the pandemic.
The world is increasingly in turmoil. The war in Ukraine has been going on for almost three months and there is no quick way out in sight while the West continues to send weapons and military resources, and countries like Finland and Sweden negotiate entry into NATO. The disruption in the fuel and food markets, which for different reasons coordinates the exit of Russia and Ukraine from both markets (while the green agenda does not allow for a rapid rearrangement of supply), accelerated the inflationary dynamic.
With varying speeds, starting with the Federal Reserve, Central Banks are attempting to withdraw the huge excess liquidity they injected to finance offsetting income and credit measures during 2020, which largely extended throughout 2021. These moves coordinated a violent correction of all assets in the world and a renewed strength of the dollar. The fall in wealth behind such a correction in asset prices added to the increase in mortgage prices due to the rise in interest rates and the steepening of the yield curve (the 10-year rate at 2.8%) has a downward impact on global growth projections (where the US would grow more than China for the first time since 1976) while inflation does not slow down in a context where wages follow behind.
In this world, Argentina should be favored. With exchange controls and without access to credit, the collapse of local assets and the spike in country risk does not have an immediate impact. In turn, the rise in the terms of trade improves the dollar account, although it has a negative impact on the fiscal accounts, given that without the pipeline that would allow gas to be transported from Vaca Muerta, energy imports skyrocket and fully impact the Treasury. However, the BCRA does not seem to benefit from the improvement in the dollar account and hardly buys reserves in the gold quarter, when the output of the harvest is concentrated. Meanwhile, the negative impact on fiscal accounts is further enhanced by the escalation in nominality itself and its impact on subsidies (with costs that rise in pesos due to higher energy import prices and the greater devaluation of the peso than the included in the program with the IMF given the escalation in inflation). But fundamentally due to the delay in the agenda to raise rates and the new spending decisions that are promoted by hard-line Kirchnerism and compete with those proposed by other sectors of the coalition related to the President who take advantage of the weakness to get an edge.
In this context, the two risks that we marked in our last monthly report – that of program execution and that of transition – are enhanced. The IMF’s incentives to drop the program are low given that from now on disbursements are negative (the country pays more than it receives), but the give and take behind each revision will appear. For now, the IMF let it be known that it will not change the agreed upon goals. The ongoing review is about the March goals that were met with forceps, but were finally met. The first waiver should come in September with the goals for the second quarter, where neither the fiscal goal nor the Reserve goal will be met, and surely neither will the monetary financing goal. The justification for the diversion is likely to be framed in the shock caused by the war in Ukraine on energy prices and subsidies. But even so, after that there are at least four more reviews until the presidential elections. Even, probably a reformulation of the program if the deviation is very large. We must see where politics is by then.
Meanwhile, we start our Base scenario for 2022 on the basis on the assumption that the program will not fall (the IMF will grant a waiver in September and another in December) and that fiscal and Reserve deviations are controlled: 2.9% of GDP the fiscal deficit (instead of the 2.5% of the Program) and the Reserves at USD8 billion in December (instead of the USD11,5 billion implicit in the program). This implies some degree of political control over economic variables that is not so easy to imagine today. Behind this, we maintain a dollar at $158 at the end of the year (The BCRA does not accelerate the crawling peg compared to the current month’s 4.1% at higher inflation) and inflation ends at 70% with economic growth at 1.6%. The exchange rate gap rises to 90% but does not shoot up. It does not take much imagination to build more disruptive scenarios in the face of the escalation in political tension in recent days based on the current nominality. For now, we prefer not to put numbers on them.
The scheme is not sustainable, it is regressive, and it is introducing us to an inflationary regime change that is increasingly perverse. Any attempt at stabilization, a necessary condition to start building a currency that allows saving to be channeled to investment, requires a horizon and governability. Both are necessary conditions to advance with structural reforms that underpin competitiveness and allow us to get rid of a low-wage model and a BCRA that does not accumulate dollars.
With a government horizon that is increasingly shorter compared to the electoral calendar, the margin to seek agreements allowing us to think about advancing in this agenda is diluted. Above all, with a government that will not allow itself to be helped and an opposition that would like to avoid, at all costs, an “asymptomatic” inheritance like the one it received in 2015. But with dubious ability to advance from 2024 on the agreements required by this agenda if the law of talion and the pendulum continue to govern politics.
