More inflation and stagflation in the electoral year
Massa’s entrance into the Ministry of Economy implied an ordering of the government coalition which went from beating the agreement with the IMF to death non-stop – while Alberto’s ruffling Cristina’s feathers drove to dismissals of ministers and the peso-debt market implosion on June 8th triggered the exchange gap – to validating, without making it explicit, a fiscal and monetary adjustment.
However, what in August 2020 with an exchange rate gap of 70%, an official dollar $35/$40 higher than today’s in real terms, a public service rate lag significantly lower than the current one and an interest rate on the dollar debt recently structured without holdouts at 11% (instead of the current 35%) would have given rise to euphoria, today it is not enough to stabilize. Understanding by this:
a) stopping an inflation rate moving today towards 6/7% per month,
b) achieving a fiscal consolidation that does not depend on the acceleration of inflation in the face of half of the spending indexed to the past,
c) limiting the transition risk of the peso debt and softening the maturity wall prior to the 2023 elections,
d) limiting the endogenous printing of pesos of the LELIQs and,
e) obtaining genuine dollars to improve the balance of the BCRA (Argentina’s Central Bank) beyond the mechanisms known to accelerate the settlement of export stock and/or postpone import payments.
For now, while inflation does the dirty job and the BCRA persists with a higher crawling peg every day, Massa launched an Export Increase Program to underpin the international reserves, after the failed ideas of the Qatar Fund, the repo with banks and the scheme created through the instrumentation of a bill in dollars at a rate of 7.5% (SOFR + 500 bps) so that cereal companies incur pre-financing of exports in foreign banks and buy this bill.
Finally, the option fell back on the traditional, where with a temporary and hidden depreciation of soybeans, USD5 BB would be settled, to which is added the IDB disbursements of USD1.2 MM finally obtained. Starting from net reserves at USD1.592 BB after three days of acquisitions for USD862 MM, stopping once again import payments, and registering the BID disbursements and the IMF net disbursements, reserves could reach USD5.462 BB, closer to the USD6.425 BB committed.
However, the solution found is not only short-term (the excess foreign currency today will be missing in the last quarter of the year) and does not alter the gap (or it just has an impact in the short term), due to which the incentives to continue settling dollars will still be negative. On October 1st the dynamic will find us with more reserves, but also with more commercial debt in dollars and more printed pesos. Added to this, it is the fact that in 2023, the needs for dollars will continue to be high. The nation has to pay off USD8 BB net of IMF disbursements. Amount that could go down to USD3.5 BB if this week’s announcements of disbursements from agencies by program and a new IMF contribution for the resilience fund take place.
With an increasingly shorter government horizon and an increasingly higher nominality (paradoxically necessary so that the variables do not end up decoupling), chances to stabilize and have real effects before the election are still conspicuous by its absence.
Maintaining the current status quo, inflation will hardly close in 2022 below 100% (taking the 6.9% inflation that arises from our price survey in August and our first measurement of 6.3% in September, inflation is required to stabilize at 6% monthly until December to reach that figure). With the indexation of contracts shrinking and all the variables running faster (dollar, public service rates, fuel, etc.), inflation will hardly be below this year’s in 2023. The higher it is, the more it will depend on the scheme that the government seeks to manage the shortage of dollars. On the contrary, the economy is going to grow a little more in 2022 with imports that continue unabated, although with a neutral carry-forward for next year and the need to reduce domestic absorption to obtain the dollars to meet the aforementioned maturities, the room to grow in 2023 is limited. On the demand side, it will depend on how wages and other income transfers (pensions and social plans) follow an inflation rate that is accelerating in an economy with an increasing excess of pesos, does not accumulate reserves and has doubts regarding contracts in pesos in a future administration, contracts which might provide the coverage and could decompress the gap as in 2015.
