No matter whether the rabbit is black or white as long as it helps play for time…
January ended and like all odd years, this coincides with the start of the election year and the seasonal drop in demand for pesos. In 2023, the presidential elections and the regime change incorporated into the range of the opposition’s proposals, mounted on a scheme of financial repression that faces a growing shortage of dollars due to the drought and worsens the printing of pesos to attempt to keep the wheel running, adds adrenaline to the scenarios.
Borrowing the allegory of the “long fuse” included in the Juntos por el Cambio’s release, the question is whether the cornered pesos bomb will explode before, after, or will not explode at all and will be feasible to be defused.
As we have stated before, the ending of the story is still unwritten: the political scenario is going to define the economic one and simultaneously the economic scenario is going to define the political one. The numbers of the economy in 2023 and in 2024 will depend on how this iteration takes place, which will be also influenced by the international context and the drought; luck is also factored in.
Several months ago, when we began to talk about the transition risk implicit in a broken bond market in pesos, we put together a double-entry matrix to think about the scenarios. In one of the axis, we included the availability of dollars: the government obtains or does not obtain the dollars. In the other axis, we included the political transition scheme: there is or there is not cooperation in the transition (it cooperates, or it does not cooperate; read by cooperation the expectation that a new administration does not breach the contracts in pesos).
Obviously, the optimal cooperation was the one that began with the pending corrections within the framework of a stabilization program, not the one that increasingly accumulated distortions trying to kick the can down the road for the next administration to deal with it. But caught in this trap, the hard wing of the opposition today finds itself with a difficult discourse in order to go through a political campaign. The promise of “chaos and sacrifice” contrasts with Massa’s promise of “order and hope”. Again, for Massa’s message to be sustained over time, “the rabbits” must continue working.
For now, the management of the scarcity through the administration of trade in the hands of the Ministry of Economy (through the SIRA) is, in Massa’s words (interviewed by journalist Horacio Verbitsky on his blog Cohete a la Luna) “what explains why the price controls that did not work for Feletti and Paula Español, work for him”. But what seemed to “work” in November and December when inflation fell to 5% monthly on average (80% annualized) in contrast to 7.4% in July (135% annualized), begins to fail at the start of 2023. January’s inflation, according to our survey of retail prices, amounted to 5.9% (almost 100% annualized).
Four factors: a) The price agreements that worked at the end of the year are beginning to crack. b) The spike in the wholesale price of meat by between 20% and 30% since mid-January. c) The increases in regulated prices, several indexed monthly, even with low weightings in the index, affect. d) The rise in the marginal dollars started to gain momentum in mid-January.
Far from being paralyzed, Massa acts; he invents a debt repurchase with reserves that he does not have to bypass the IMF and intervene in the exchange rate gap and seeks to leverage the operation with a repo with banks using the repurchased bonds as collateral. On the other hand, he relaunches the “fair prices” agreement, while actively seeking sources of dollars including the rain dance to moderate the costs of the drought.
It is clear that in any case (with varying degrees of nominality) in 2024, the program should start by correcting relative prices, and this includes a discrete exchange rate jump in December 2023 and/or January 2024, a response regarding the maintenance of the contracts in pesos and a definition of the end of exchange controls. If the program goes well, at best, inflation in the last months of 2024 could go back to below 2% per month (25% annualized), but inflation in 2024 will hardly be below the level of 2023 (even with a devaluation in December 2023).
The hedging schemes of the private sector during 2023, facing the visualization of what may come in 2024, are what will define whether the inflation rate this year will repeat the 100% of 2022 (data as of November in the “the rabbits are enough” scenario) and/or jumps a level again as in 2022 130%/150%? (the “rabbits are not enough” scenario where the spiraling of the exchange rate gap and inflation complicate the transition). In any case, with neutral statistical carry-over, with the direct impact of the drought and indirectly through the contraction of imports in the face of dollar restrictions, the economy would fall by between 2% and 3%.
