The Government reached a new agreement with the IMF, underwent financial pressures and lived with high inflation. The next scenario
For Lorenzo Sigaut Gravina
12/25/2022 – 4:29 p.m.
After the consecration of the Argentine national team in the Qatar soccer world cup that was played at the end of 2022 to take advantage of the lower temperatures of the desert, Christmas and the end of the year arrive. It is a good moment to stop the ball – the reader knows how to excuse the soccer passion that sneaks into me in these lines – and analyze what 2022 left us in economic matters to visualize what next year can bring.
Many things happened in 2022, perhaps the most relevant being the Russian military invasion of Ukraine. This war not only modified geopolitical relations -the Western powers aligned themselves against Russia- but also generated an accelerating shock of inflation on a global scale, as a result of the skyrocketing of the international price of grains and energy. The sharp rise in these commodities modified the expansive bias of the economic policy that most countries had been implementing to reverse the negative effects of the outbreak of the Covid-19 pandemic.
The inflationwhich had been accelerating in 2021 as a result of bottlenecks in global production chains, post-pandemic demand recovery and abrupt changes in consumption patterns, reached record levels in decades after the Russian military invasion of Ukraine, forcing the majority of the economies to implement contractionary policies. Although there are signs of moderating inflation, the monetary policy tightening it would not have finished yet and its impact on the world economy -which is not immediate- will be fully seen in 2023.
Agreement with the IMF, resignations and more inflation
Another milestone of the year that is ending was the signing of the agreement with the IMF late March. After many delays that deepened the deterioration of the BCRA’s international reserves due to the payment since September 2021 of the first capital maturities of the “Stand by” agreement signed by Macri, the Executive avoided default -“Arrears” in the Fund’s jargon – and obtained fresh funds thanks to the repayment of capital payments made to the IMF. However, the improvement in expectations was negligible and, in mid-2022, the demand for debt in Treasury Pesos plummeted, and both the country risk and the exchange gap skyrocketed.
The Guzman’s resignation at the beginning of July exacerbated financial and exchange rate pressures, which only managed to be channeled with the arrival of Sergio Massa to the Ministry of Economy. But the “crisis of the three ministers” produced a second accelerating inflation shock -purely and exclusively local- that took it to a 7% monthly average during the July-August two-month period. The deterioration in income as a result of the new price shock, together with the tightening of the stocks due to the lack of foreign currency, put a ceiling on the level of activity.
Finally, thanks to the capacity that Massa’s economic management has shown, the year 2022 closes by meeting -with some changes and creative accounting- the annual goals agreed with the Fund. Among the main measures implemented by the Treasury Palace are: the “soybean dollar I and II” which propped up the BCRA reserves and improved fiscal accounts by not including the subsidy for exporters as primary spending; the steps to unlock and/or expedite the financing from international financial organizations; the possibility that US$5,000 million of the China swap are freely available; and the recent signing of an agreement automatic exchange of financial information with the US which will provide the treasury with a valuable tool against tax evasion.
The soybean dollar, in its two iterations, made it possible to sustain the Central Bank’s reserves.
But in socioeconomic terms, the sharp acceleration of inflation -which together with the CBA (Basic Food Basket) and CBT (Total Basic Basket) rose around 100% in 2022- reduced the purchasing power of workers. Despite the fact that the growth in activity – which averaged 5% as a result of the statistical drag of 4% left by the end of 2021 – boosted employment, offsetting a large part of the drop in real labor income, it is likely that the improvement in the rate of poverty and indigence observed in the first half of the year has turned into a deterioration in the second half of 2022.
Economy 2023: what can come next?
The prospects for next year do not look favourable. As I mentioned, The international context will not be buoyant next year and the drought not only significantly reduced the fine harvest (wheat and barley), but also jeopardizes the thick one (soybean and corn)..
In terms of activity, the end of 2022 would not leave a positive statistical drag and the potential loss of exports from agribusiness due to lack of water would exacerbate the external constraint (There would be no foreign exchange to pay for the imports necessary for the productive apparatus to expand). Therefore, what happens to inflation in 2023 will be key to determining whether the recent deterioration of socioeconomic indicators. Most likely, the price rise will once again be around 100%, but the Government clings to deepening the slowdown in inflation observed in November -especially in food-, to drop to 60% -4% monthly average- the rise in prices in 2023. As we anticipate, such a decline in inflation will be very difficult to achieve.
In summary, the economic result of the year in which Argentina won the men’s soccer World Cup for the third time was mixed:
- GDP grew but there were two accelerating inflation shocks.
- Employment rose but labor income fell in real terms.
- Net reserves were accumulated, but exclusively thanks to disbursements from International Financial Organizations (indebtedness).
- The goals of the agreement with the IMF were met, but it was necessary to reformulate them and appeal to creative accounting.
- Although a financial-exchange crisis broke out in mid-2022, it could be contained after the change of economic authorities.
The economic prospects for next year do not look auspicious, in a context of greater uncertainty due to the presidential elections. Let us hope that the rains finally arrive in time so that the heavy harvest does not suffer and the economy maintains stability while awaiting the next president-elect. I choose to believe.
