Report #150 – July 26th of 2019
- Extreme polarization… Is it enough to ensure the re-election?
- No middle ground… strategist or irresponsible?
- What does the FMI project for us?
- Against any forecast, the debt with the IMF does not lower debt with the market
The government’s bet on re-election is deepening and has begun to pay off in the last two months with improved polls, which until recently showed a sure defeat and fueled the vicious circle. Vicious circle in which financial contagion hindered the real economy and polls, which in turn impacted the financial dynamics and so on and so forth.
The change in global liquidity and in local political alliances with a shift to the center after the incorporation of Miguel Angel Pichetto and Alberto Fernández as Vice President and President respectively, along with the battery of measures to boost the short term and keep the dollar in check with the IMF’s green light to intervene on the spot and futures exchange market, and a huge disparity in the handling of the campaign, considerably helped turn this dynamic around.
An exchange rate in check, underpinned by a very high interest rate (LELIQ’s 58% floor until August 15), a reduction in the spread via lower banks reserves requirements sustaining time deposits rates at 49% to limit pre-election dollarization, and a monetary program that validates a focused credit expansion (“Ahora 12 and “Argenta” credit), allows moderating inflation and boosting consumption in the margin. July’s inflation will likely be closer to 2.2% than 2.7% in June, while there is improved margins in consumption of durable goods (cars, motorcycles, household appliances and even textiles) and improved consumption and inflation expectations as a whole.
However, this change in expectations does not necessarily improve the current situation (the photo), but it does change the expectation that the floor and ceiling in the recession and inflation respectively are close. The official message is that the 2018 financial crisis left us in the middle of the river and that it is up to the Argentines whether to cross to the other bank or go back to the past.
The official campaign aims to show the contrast between the future that awaits us with images of public works being inaugurated and the stagnation, inflation, theft and lies Kirchnerism subjected us to. Meanwhile, the opposition resorts to showing rampant inflation, drop in real wages, poverty and the change in consumption habits with Cristina contemptuously describing second brands with derogatory names. Such messages are refuted one by one with a tailor-made campaign in which the alteration of statistics by the Kirchnerism leads to a struggle between polar-opposite narratives.
Nobody dares to guess which of these two extremes – none of which could win under normal circumstances but by opposition to the other – will come top in the election. But the economy short-term dynamics is closely related to how this outcome begins to take shape in the primaries on August 11, the first round on October 27 and, eventually in the run-off on November 24, and how the financial dynamics and real economy are fed back.
The fact is that this campaign, flowing through crossed panegyrics and diatribes, takes place in a market with binary views on both extremes and that not only defines the prices of various local assets (dollars, bonds, and stocks), but also indirectly, and given the maturities concentration until October (LETEs for US$7.8 B and LECAPs for $250 B) with a Treasury that is selling dollars in the transition and a Central Bank (BCRA) willing to intervene to contain the dollar, may lead to a new financial crisis if uncertainty increases out of control and/or becomes the wrong certainty.
Paradoxically, and contrary to what part of the society may read through, the “Juntos por el Cambio” ticket implies in the short term a lower adjustment of the economy given the market reaction itself which in one case would allow the short-time debt to be comfortably refinanced and harmonically go through the year end and in the other case, it could lead to a problem with the fiscal, monetary, and financial programs in a context where the Government seems willing to use reserves to limit contagion into the exchange market if they dynamics boosts country risk.
The year 2020 is another story. The risk is that, even with an orderly transition in a re-election scenario, with a divided society and a Congress split in half, consensus to move forward with these reforms might not be reached and the road might become unstable even if the bet on the re-election is validated. The matrix of scenarios for 2020 we began to outline in our previous monthly report and to which we add numbers in our Special Report: “2019 & 2020 Scenarios”, remains current.
