The challenge of recovering credibility

EL ECONOMISTA – Two and a half years after the arrival of Cambirmos the Government, there is no doubt about one of the main shortcomings in managing: the absence of a strong and credible economic policy. Had it existed from the beginning, Argentina would have saved the discomforts that we experienced in recent weeks. On the other hand, the government of Mauricio Macri persisted in giving ambiguous messages and in breach of his own goals, thus injuring its credibility.

As an example, a first self-inflicted error occurred with the disinflation policy. Recall that, for 2017, the BCRA established an inflation target of 17% while real inflation was around 25%. By 2018, the original goal was 12%, but last December it was recalculated by 15% and, to date, it was rejected by the Government itself. It was this deviation and systematic correction of the inflation goals that led to a deterioration in confidence, difficult to reverse.

Both in this and in other questions, the error came from over-optimizing the economy’s response to the renewal of covers. In other words, they thought that by having a solidly trained team with a recognized track record they could manage expectations, both to lower inflation by simply announcing the goals and to automatically attract investments and reactivate the economy. But if I intend to affect expectations, it is not enough just to announce it; I must also gain credibility with facts that prove it. In this case, the excess of money supply put the process in check and inflation did not yield.

Returning to the main idea of this article, the absence of clear rules is enormously detrimental to any economy. As with the inflation targets, the absence of signs of reducing the fiscal deficit, the inability that the country is demonstrating to prevent national savings from escaping abroad and a discretionary exchange rate policy was responsible for nullifying the credibility. In the same way they do it on a daily basis the contradictions between officials (the comings and goings between Guillermo Dietrich and Marcos Peña about the tax on trips abroad are an example of this) or rumors that are not denied instantly (that on the rise of taxes to the field or on a possible tax on the financial income of shares a few weeks ago, both already denied). In a context of uncertainty, the last thing that should be done is to let run rumors so harmful to the market.

The indicators of reality, such as the Survey of Market Expectations (which foresees an inflation of 30% for this year) or the instability in the bond and stock market confirm the thesis that we are in a stage of disbelief. Macri’s effort to convey the idea of a better future was perceived in the political sector as a very effective strategy. But economic agents (investors, economists, banks, companies and academics) pay more attention to facts than to speeches.

Until today, the Government seems to have partially learned this lesson. The unprecedented program negotiated with the IMF and the announcements derived from it such as the freezing of hiring in the State published yesterday in the Official Bulletin show a concern to strengthen the search for independence and credibility of the BCRA and accelerate the rate of reduction of the fiscal hole. However, this is not enough to reverse the climate of distrust. Now the Government must comply with the agreement.

In turn, if we talk about expectations, we can not fail to mention the need for a political class that lives up to the situation. Those who lead the opposition in the polls should understand that it is not the time to sell demagogic solutions that fall behind more than they add up. The more frequent these types of proposals are, the market will incorporate even less the possibility of a quick recovery and the more difficult it will be to achieve it in the facts.

Ultimately, the best thing the government can do is announce and follow a fixed economic policy rule at once – instead of acting discretionally – and must be credible at whatever it takes: if you give in to the temptation to abandon it, economic agents will incorporate the possibility of default into their expectations formation mechanism, so that they will end up obtaining a more unfavorable result (similar to what would have been obtained at the outset with a discretionary policy).

Recomposition of predictability is what is required to reactivate the economy. As a first step for this, the Government must redouble its efforts to send a clear message about the policy that will be followed, however unfriendly, and to comply with the agreement with the IMF. If Macri succeeds, it can turn the economy around and win the elections next year. Otherwise, the cost of repeating mistakes would be greater this time.

Written by Eric W. Grosembacher

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