Is it enough or does it become a boomerang?
The government continues to play for time, resorting to successively splitting the exchange rate in order to manage the growing shortage of reserves it faces, before embarking on a stabilization program of certain costs that are higher with each passing day.
The objective of “devaluing in dribs and drabs for different sectors” and continuing to tighten the exchange controls is an attempt to kick the can down the road for the next administration without a discreet devaluation leap, aiming to contain inflationary inertia not much beyond current levels and trying to affect the activity as minimum as possible. Activity which is based on a level of imports that cannot be financed, without reserves and without credit.
With a finite horizon until the change of administration, with a world that is becoming more complicated every day (higher rates, lower commodity prices and countries entering a recession), with a drought affecting harvest projections and with true risks that the truce within the government coalition that led to Massa’s arrival at the Ministry of Economy falls apart, the chances of a stabilization plan working are low.
As we have been stating, behind inflation, a very violent spread of relative prices (very expensive goods, very cheap regulated services and very deflated wages, especially in informal sectors), and an exchange rate gap above 100%, growing deterioration of the BCRA (Argentina’s Central Bank) makes itself felt, institution which simply has an excess of pesos and a shortage of dollars. And based on the way the government has been handling the situation, the dollar shortage will deepen even further so will the excess of pesos. As of today, the quasi-fiscal deficit due to the interests on remunerated liabilities (Leliqs plus Repos) is double the fiscal deficit for August ($5.50 BB vs $2.25 BB).
Due to this present situation, any attempt to freeze prices and the official dollar would only further the shortage in an economy that must reduce its level of imports by more than 20% (from USD6.2 BB monthly net of energy to USD5 / 4.5 BB monthly). Therefore, it would also impact the exchange rate gap and the creation of parallel markets for goods and services. The dynamic could be even more perverse if in the negotiations with the companies, they were offered a higher export dollar than the import dollar in exchange for freezing their prices. Above all, because the very scarcity of foreign currency makes the promise of accessing the official foreign exchange market unviable.
It is ten months to go for the primaries (if they are not called off) and fourteen months for the change of administration, an eternity for the increasing level of nominality. With inflation running at 6.2% monthly in September (106% annualized), with bargaining processes that reopened after the conflict with wheel tire workers for three or four months, they were placed at 10% monthly (200% annualized). With a dollar that rises daily at a rate of 6.4% per month (110% annualized), and with public services rates that, beyond the postponement of the increase scheme announced by Massa when he took office as minister, should go above inflation.
With no anchors in sight, the risks of a new escalation in nominality are extremely high, especially if there is no cooperation scheme between the incoming government and the departing one. For cooperation we mean that contracts in local currency be respected or, at least, not be warned they are not going to be gone by. If there are no contracts in pesos that allow you to move from one government to another, the growing excess of pesos will seek shelter in the parallel dollar and/or on the goods market, which will further worsen the inflationary escalation. Above all, if the foreign currency restriction forces the economy to continue closing the economy, doubling the number of non-automatic licenses and increasing the the local price of goods.
A hyper inflation is not built overnight. But we are actively working on forcing a new change in the inflationary regime that today is already above three annual digits with lagging relative prices (dollar, public utilities rates and fuel), with a very closed economy, bargaining processes that are beginning to reactivate and adjust upward, a fiscal and monetary policy that needs (and also triggers) inflation to accelerate and a quasi-fiscal deficit that is beginning to be worrying in a context where the dollar interest rate prices the default.
It is literally a pressure cooker, which requires to cool down before removing the lid as part of a stabilization plan. There is no room for gradualism, but the shock requires consistency and, above all, political management of the distributive effects it causes. For the time being, we prefer not to put numbers on a disruptive scenario, although today literally “all the balls” are in the air.
