Facing 2016: neither immobility, nor shock
Neither Immobility Nor Shock
Distributive Struggle in three dimensions
Two Agendas: External and Internal
Treasury Debt Relief, Debt for BCRA
The macroeconomic scenario of moderating inflation and boosting which started slightly in October last year is now in full swing, with 80% of the joint salary agreements already closed, increases in social and retirement plans that ensure an abundance in the supply of pesos in the economy, and a demand for the national currency which is limited by a Lebac interest rate at around 27% while the exchange rate remains as a semi anchor. The truth is that today we see a reversal of the “ominous” expectations set about the economy six months ago, and together with the expectation for the new administration as of December 10th, 2015, these have been significant stabilizers of this scenario. Such expectation has opened the possibility of beginning to leverage the economy after a decade of deleveraging, first through flows (budget surplus) and later through stocks (Central Bank). A leverage that since the setback in the credit schedule that had begun with the Government (ICSID, Repsol and Paris Club) with the rejection of the US Supreme Court, was moderated with the market and basically through the swap agreement with China.
However, the expectation of change in the new administration begins to decrease as we approach the elections. On the one hand, the “naive” scenarios that were constructed for 2016 begin to fade and the discussion regarding the distortions built up in the economy are starting. On the other hand, the natural lack of detailed definitions on the new agenda, beyond the general orientation, begins to impact on the markets, with an interest rate of 10-year dollar debt in the area of 9.7% (8% for two years) after having drilled the 8% rate three months ago and an implicit exchange rate gap in cash-settled transactions which returned to 45% from the 30% in which it had stabilized since early this year. Amidst this, again we hear statements made by the main opposition candidate who states the immediate elimination of ” but without clarifying that if this happened it would be at a much higher price than the current official dollar rate. It is worth remembering that at the start of the new management, any attempt to remove FX restrictions will involve an overshooting of the exchange rate of the interest rate with significant regressive redistributive consequences in a country that does not have a nominal anchor; the contradictory signal that this also contributes to market volatility with the inherent risks and, by not being explicit, the approval of an “unaware” portion of the citizenship. but without clarifying that if this happened it would be at a much higher price than the current official dollar rate. It is worth remembering that at the start of the new management, any attempt to remove FX restrictions will involve an overshooting of the exchange rate of the interest rate with significant regressive redistributive consequences in a country that does not have a nominal anchor; the contradictory signal that this also contributes to market volatility with the inherent risks and, by not being explicit, the approval of an “unaware” portion of the citizenship. any attempt to remove FX restrictions will involve an overshooting of the exchange rate of the interest rate with significant regressive redistributive consequences in a country that does not have a nominal anchor; the contradictory signal that this also contributes to market volatility with the inherent risks and, by not being explicit, the approval of an “unaware” portion of the citizenship. any attempt to remove FX restrictions will involve an overshooting of the exchange rate of the interest rate with significant regressive redistributive consequences in a country that does not have a nominal anchor; the contradictory signal that this also contributes to market volatility with the inherent risks and, by not being explicit, the approval of an “unaware” portion of the citizenship.
Beyond the campaign strategies, it is clear that the scenario of “doing nothing” is not feasible. Specifically on the domestic front, by 2016 there is no possible scenario where wages rise again at twice the rate as of the exchange rate while tariffs remain frozen and the fiscal deficit increases 1.5 pp of GDP as seen this year. Neither is it possible to scenario to transit 2016 without greater openness to credit. Again, if the expectation of a new agenda is diluted after December 10th, there is no chance that the cost of financing will drop. At the other end, there is also no readily available shock scenario. The initial low debt levels, a financial system in pesos and the existing capital controls do not allow the market to be the one to trigger any correction, and thus the gradualism will be defined by the policy itself. And without a nominal anchor, there is no room to correct relative price distortions via a sharp devaluation of the local currency, as the neighboring countries did in a context where the dollar has strengthened globally. Meanwhile, building to nominal anchor is not something that is overnight: to reset credibility in domestic currency as a store of value takes years and Argentina lost a significant opportunity in the last decade when the dollar devalued in the world.
However, both the internal and external agendas are interrelated. The more progress made in unlocking the external agenda, the greater the ability of the economy to reduce the cost of financing in the market, which is essential to narrow the fiscal dominance and, in parallel, to supply dollars to the economy while making progress in the development agenda. The latter requires correct fiscal and relative price distortions that perpetuate the shortage of commercial dollars and the congestion in public services.
Disarming the relative price distortion, in a context where inflation is currently around 23%, requires, to understand that in Argentina we have at least three distributive struggles coexisting: 1) capital and labor, with the return to dichotomy between real wage and salary after a decade of consistent increase in wages in dollars, 2) among capital , between protected sectors (those who sell goods and services to the domestic market) and unprotected sectors (those with regulated prices and which do not receive government subsidies, and export sectors, whose stagnation and / or drop is reflected in the congestion of public services and the loss of external surplus) and 3) public and private sectors, based on an effective tax burden of 12 pp and 16 pp of GDP, respectively, over the average of the 90’s and 80’s when considering only the resources of the national government, and which affects the two previous struggles, besides the fact that any attempt to use this to correct the other two ways to lower tax burden would result in the fiscal relationship between the National government and the provinces.
Indeed, the low exchange rate, high protection of the domestic market and the public sector with a very active social policy are, at the same time, both the mainstay of the high levels of the main generators of distortions on the profitability in tradable sectors and the lack of infrastructure investment in regulated sectors, which locks the development of the economy in a context of external constraint. Fortunately we are far from the scenario where the market imposed the policy (looking at Greece today is enough to see how costly it is), but we are also from the 2003-2010 scenario, when the huge FX and international prices cushion twin surpluses that allowed the real independence of the debt markets.The challenge of the economic agenda will be to take advantage of the international credit to graduate corrections and rebuild the balance, aiming to sustain the initial high levels of employment; a minor challenge that will require an explicit social agreement, an important management of “governance” and the need for, as a State Policy, start building a nominal to avoid future abuse of exchange rate appreciation as the only anti-inflationary tool.
