Argentina 2023
The extreme drought and the banking crises that began in the US and spread to Switzerland (although for the moment it is about to be stopped by the quick action of governments and central banks) adds adrenaline to the dynamics of the economy in the election year. For now, expectations of new increases in the Fed’s interest rate have plummeted amid an aggressive correction of financial assets (mostly banks) and, to a lesser degree, of commodities.
February’s 6.6% inflation rate and the 7% three weeks into March measured by our retail price monitoring (RPM) confirm that the best economic scenario for the economy this year is to close with inflation rate as of November (before the change of administration) at around 100%/110%. However, the risk of demonetization of the economy, worsened by the shortage of dollars caused by the extreme drought and the message from the opposition casting doubt on the peso contracts in a next administration, begins to escalate.
We are still maintaining the two scenarios that we proposed in our report at the beginning of December “Predicting the “apocalypse” that never comes”. Scenarios called “Rabbits are enough” and “Rabbits are not enough” clearly hinting Massa’s ability to negotiate with carrots instead of with a stick. Such scenarios still hold although now GDP fell even further to a range of -4%-5% due to the direct impact of the drought (primarily through the drastic decline in the supply of dollars). At the same time, we increase the likelihood of a negative scenario where the accumulated inflation in November rises to 130%.
Basically, in this second scenario, uncertainty reduces the effectiveness of cross-controls on the exchange rate gap. Which, along with the increase in the demand for hedging against a sure jump of the exchange rate at the start of the new administration, it’s beginning to filter into inflation, which the rest of the variables are trying to catch up with (official dollar, wages, utility rates). We still do not include a discrete jump of the official exchange rate, but rather an acceleration of the devaluation rate (today around 6% monthly) in the face of the jump in inflation. Even though the shortage and the consequent need to continue restricting imports is such that the questions about a discreet jump in the dollar, which had been diluted with the arrival of Massa to the Ministry of Economy, reappear while a third soybean dollar is delayed. The same applies to the question of an eventual new exchange rate splitting and/or greater restrictions to the exchange rate controls, something that would even be encouraged by the IMF itself. The risk of a free financial dollar under these conditions of fluxes and stocks of pesos and dollars without horizon is very high, so we believe that the government will try to continue managing the gap with ad hoc negotiations sector by sector, company by company with diminishing returns.
One understands that beyond the hawkish discourse on the part of Juntos por el Cambio in the midst of the Primaries (PASO), Baglini’s theorem will work.
But, in the meantime, uncertainty regarding how to move from a scheme of financial repression to one of greater economic freedom, nullifies the effectiveness of the hedging that in 2015 was what allowed the election year to go smoothly. The last rabbit that Massa has to deliver to the private sector is precisely hedging.
Amid great uncertainty, we consider two obvious certainties. The first is that the election calendar goes on. June 14th is the deadline for alliances and ten days later the closing of ballots where we will finally know the electoral offer. On August 13th, the Primaries will take place and on October 22nd the general elections. If there is a run-off, it will be on November 19th and the change of government on December 10th. The second certainty is that polls always fail.
As of today, and analyzing the economy, the expectation is of a change, but the setup of the electoral offer (today the government coalition looks more organized than the opposition coalition) can bring about surprises that depending on where they take place, they will influence the scenarios outlined in the previous paragraph. As we have been saying, politics impacts on the economy and the economy impacts on politics. As the scenario gets shorter, the right question is not whether we get there, the right question is how the economy gets there in the face of this iteration and its electoral correlate.
