Impact on the Economy and Polls in a Turbulent World
Since our last report, things happened. The escalation of the war in the Middle East nearly doubled oil prices, with certain global impacts on inflation, the dollar, and interest rates. The uncertainty regarding the duration of the conflict, the magnitude of the damage it is causing to infrastructure, and the resulting geopolitical order make scenario-building enormously difficult.
Powell himself, at the last press conference following the Fed meeting, stated that “making forecasts right now is, in a certain sense, like shooting in the dark given the uncertainty surrounding the conflict,” while simultaneously halting the decline in the reference rate as the curve steepens. At the close of this report, the market is once again pricing in a truce after Trump announced for the umpteenth time the start of negotiations, this time without Iran immediately denying it — in fact, the President stated that he is “ready to have conversations.” All while videos circulating on social media begin to show increased ship traffic through the Strait of Hormuz. Too early to tell whether this TACO — “Trump Always Chickens Out” (coined by Ian Bremmer) — works to de-escalate the conflict.
Returning to Argentina: while it is true that the surge in energy prices with a barrel of oil above USD 100, and its downstream effects, improve the outlook for the external sector and accelerate investment announcements under the RIGI framework, the two questions we used in our last monthly report to extend scenarios — regarding Trump’s political horizon ahead of the November U.S. midterm elections and Milei’s chances of being re-elected without a runoff in 2027 — now have less assertive answers. This is reflected in the stagnation of Country Risk above 600 bps, after having broken below 500 bps in January, and in the Economy Minister’s decision not to issue debt in the international market, validating the wall of maturities in 2027.
This is partly explained by the decoupling of inflation — which for various reasons (in March due to fuel prices, education, and utility rates) is running at around 3% monthly (42% annualized) — from a dollar price that functions as an anchor, with the real exchange rate lagging again. Taking as a base of 100 the day Macri lifted capital controls, we are now back at 84, compared to the starting level of 80 and the lows of 78 reached last April. Taking average inflation of 2.5% with a stable dollar, by end of June we would return to starting levels.
Partly because of the impact on employment and income of the “productive transformation” the Government promotes via sectoral incentives to the new while the old is forced to adapt to an abrupt change in the rules of the game (a lagging dollar, trade opening, high rates, still-damaged infrastructure, and a similar tax scheme). All this in a world where, before the war, it already faced an abysmal technological leap and an avalanche of Chinese exportable surpluses that compete not only through prices but now also through cheap financing. And where labor market data is beginning to reflect a growing deterioration in formal employment no longer offset by the self-employed or informal workers. The unemployment rate for Q4 remains low, but by year-end it stands 1.9 percentage points above starting levels, at 7.5%, and unemployment reaches 1.7 million people. The adaptation strategy of these sectors is a mix of imports, scale, platforms, monotax, and informality.
Partly because the narrative behind the epic saga Milei proposes — which includes “Morality as State Policy” — clashes with the “stumbles” involving officials amid cross-cutting internal disputes within the government.
For now, the visualization of a greater supply of dollars from the external sector resulting from new oil prices and the impact of inventory drawdowns on the fall in imports contrasts with declining tax revenues and a fiscal authority that cuts spending as needed to ensure fiscal balance. In February, expenditures fell an additional 9% in real terms to sustain fiscal balance, while new trade balance projections double those of 2025 (USD 20 billion). With formal employment falling, incomes on the defensive, greater spending adjustment, and banks and financial entities still digesting the rise in delinquency coordinated by the pre-electoral monetary tightening, the government seeks to reactivate credit. On one hand, enormous coordination between the Treasury and the BCRA to recreate the reverse repo window and reduce volatility in short rates, which have returned to 20% TNA. On the other, this morning’s announcement by Banco Nación offering subsidized credit to companies and families: working capital at 25% TNA, check discounting at 23%, and 20 interest-free installments for the purchase of final goods.
Will the larger dollars from the trade balance be enough to extend the carry with negative real rates when the seasonal supply of dollars reverses after July/August — in a context where most of the dollars purchased by the BCRA went to pay debt maturities? Unlike 2025, today the upper band (indexed to inflation) operates 18% higher and the policy margin to balance objectives — beyond the narrative — exists.
