“Do you think 9% inflation is bad? Try 90%,” headlined an article in The New York Times for minimize the soaring cost of living in the United States.
In the North American country, the price index climbed to 9.1% year-on-year last month, the highest rate in four decades, in a jump driven mainly by the rise in fuel prices.
However, the New York Times sought to mitigate the concern of Americans by comparing that reality with the pockets of Argentines. The newspaper indicated that “many economists expect inflation (in Argentina), which is already 64% year-on-year, to reach 90% in December.”
The newspaper indicated that “many economists expect inflation in Argentina to reach 90% in December
The data seeks to tone down the latest measurement from the US Bureau of Labor Statistics. He even speaks of “one of the worst economic crises in the country in decades, and that is saying a lot in the case of Argentina”.
The newspaper reviews the hyperinflations unleashed in the last 50 years and talks about the interest of Argentines in buying dollars.
Argentines and dollars
He says that in Argentina people “hide dollars in their underwear to go do some important transaction” and points to the case of a Venezuelan immigrant who wonders: ´Have I emigrated to the right country?´”.
However, the New York newspaper highlights that Argentina is a mixture of resilience, adaptation and strength.
“Argentina shows that people will find a way to adapt to years of high inflationliving in an economy that is impossible to fathom almost anywhere else in the world,” he says.
Argentine inflation forecast
The announcements of the new “super” Minister of Economy, Sergio Massa, generated different analyzes in the City regarding what may happen in the coming months with the dollar, inflation and activity. Especially, he made noise the expression that “there will be no devaluation” of the exchange rateamong other statements of the official.
To analyze what can happen with the key variables for the country, iProfesional spoke with Juan Luis Bour, director and chief economist of FIEL.
One of the main points raised is that a Inflation that continues to accelerate “is inconsistent” with the announcement of a stabilization program.
-After the political changes and announcements of Massa, how is the economy situated?
-In the first semester primary fiscal deficit reached 2.2% of GDP, and it can even be said that it rose to 2.8% if property income is excluded, by the use of IMF Special Drawing Rights (SDRs).
This implies not only a leap from 2021, but a very high level requiring extraordinary financing which Argentina does not have. Hence the jump in issuance, despite the fact that former minister Guzmán had already used the resource of limiting cash payments, as former minister Batakis was to announce a few days later.
So with a uncontrolled primary deficit in the first half of the yearabout which Batakis could do little, new expenses were added with the announcement of the new moratorium by the President of the Nation, plus the special August bonus for recipients of the Enhance Work program and the massive appointment of officials in different ministries .
Massa’s arrival at the Ministry of Economy raises several questions for experts.
In this way, the cash adjustment announced by Batakis was only a promise in a context of strong monetary issue, which led to a jump in the exchange rate gap and the loss of reserves. In fact, the Central Bank ended July with barely US$38 billion in gross reserves, a level that marks the narrowness, or desperation, that characterized the actions of the Ministry of Economy and the Central Bank in the first two months of this year, to sign a new standby program with the IMF and get some “air”.
-And how is the situation now?
–The “air” ran out and in August it is necessary to fill the BCRA’s coffers again to “throw away” a few more months, or face the need for an adjustment of public accounts. In that we are with the assumption of the new minister Massa.
-How do you evaluate Massa’s ads?
-Regarding the announcements, although there is still no precision in the instruments to be implemented, they suggest that an attempt will be made to follow an intermediate path that entails some attempt to put a stop to the increase in the primary deficit. And, with it, to the financing needs. Also some inflow of funds that allows us to get out of the situation of negative net liquid reserves in which we are at the beginning of August.
Thus, the limit to the primary deficit could come, in the first place, from the way of calculating it, that until now had enough use of “creative accounting”. We will have to see how this continues and it should be taken into account that with very high inflation the levels in constant pesos can be liquefied.
-How can such high levels of inflation affect it?
-Rising inflation is usually an ally when computing the deficit at constant prices, since there are payments that are associated with the past through legal delays, as in the case of retirement, pensions, social spending and, in general, salaries. But this assumes that inflation continues to accelerate, which is inconsistent with the announcement of a stabilization program.
The The main source of announced spending cuts is associated with the consumption ceiling From which the subsidies would cease, which is added to the elimination of the subsidy for medium and high-income consumers.
The sources of financing and the public deficit is put in the magnifying glass by Juan Luis Bour of FIEL.
What other ads caught your attention?
-Others Minister Massa’s announcements repeat what was already foreseen in the announced “Batakis plan”, which, paradoxically, ended with a record increase in fiscal commitments in less than a month of execution. In addition to the aforementioned (moratorium, bonus and public employment), the information that unlocked the works of the Santa Cruz dams is added.
Finally, some announcements from the new Minister involve an increase, not a reduction, in spending, including the bonus to retirees that would be granted in September. This, however, could be an alternative to stop other much more costly initiatives, such as a claim for a new IFE to compensate for the increase in inflation.
-You mentioned that public spending, which is an issue that is under scrutiny, would continue to increase. How do you read this?
The strategy is much more like “limit the increase in spending, since it will increase”, than to apply the alternative of “stopping the increase in spending and making it fall significantly in real terms”.
-What are the impacts of the announced measures?
-Regarding the short term impactat this point a distinction should be made between the impact of general announcements and the impact of specific measures, since they are not equivalent.
That is, the announcements, generally vague, tend to have some short-term impact by generating arbitrage that give rise to immediate movements, such as the transitory entry of capital and early settlement of exports.
In summary, the announced measures are still far from being concrete, with some exceptions, and from constituting a set that can be defined as a program, since, at the fiscal level, the instruments seem insufficient to achieve the planned goals in terms of fiscal deficit of 2 .5% of GDP for the whole year. Of course, unless creative accounting and inflation are added as instruments to get closer to the goal.
The way in which the monetary issue will be cut is one of the questions that economists have.
-It was also announced that the monetary issue will be reduced…
-Result Difficult at this point to assess by what means the monetary issue will be reduced which has several sources: assistance to the treasury, issuance to support the price of the debt, issuance that requires a “successful” scenario of liquidation of exports and the one that results from paying interest on the stock of Leliq and repos of the Central Bank.
It must be remembered that at current interest rates and the stock of debt, implies the payment of interest at a level close to 350 billion pesos per month.
Therefore, it is very clear that we are far from an economic program that deals with structural balances that Argentina faces. As far as we were with Guzmán and Batakis. Therefore, it is only a question of evaluating a set of short-range announcements/measures.
Without clear indications about the fiscal and monetary program, even when the announcements indicate that the objective is to reduce imbalances and monetary financing to the treasury, it is necessary to wait for the economic program to appear. This is through making explicit the instruments, at what level and at what times they will be applied, and what is the expected duration of the program.
This is for the next 3, 6 or 17 months, since it is not a long-term program. In normal times, the program for next year should come from the General Budget of the Nation, which today has little credibility.
-What can be expected in this context for inflation and the dollar?
–In terms of inflation, it is necessary to anticipate that the coming months will not give much respite, since unless the program appears and allows the exchange rate gap to be drastically reduced, there are no elements that “anchor” the price adjustment expectations.
Inflation, according to Bour, is complex for its upward inertia to decrease in the short term because expectations must first be anchored.
In fact, the succession of announcements about major rate adjustments, added to the announcements of salary adjustments, in a scenario that still maintains characteristics of fiscal dominance, maintain a floor for the inflation rate as of August of 6% per month.
Without fiscal and monetary program, there is not much room to hope that inflation will not reach a new three-digit annual level in a few monthsbecause the mere persistence of rates close to 6% per year implies that, sooner or later, this new level will be reached.
By then, the Minister of Economy must dust off a new program that allows us to encourage hope near stabilization. This is still pending.-