A future conditioned to the responsibility of our politicians

PRENSA ECONÓMICA – To understand what awaits us Argentinians, we must understand how we came to a currency exchange that resulted in a cut of credit for the government and, therefore, in an agreement with the IMF. Undoubtedly, the first reason is the failure of “gradualism” in the ordering of public accounts, which was based on a highly optimistic scenario of a world always generous with liquidity. The most serious thing is that all the forecasts coincided that, starting this year, international financing conditions would be less fluid; but, even so, it was decided to move slowly in the reform of the State.

Although the above was the origin of the problem, the moderate international turbulence of 2018 found a Central Bank of the Argentine Republic (BCRA) that had lost all credibility and something less insolvent than what this government found. Unfortunately, the previous BCRA management lost the opportunity to regenerate the confidence of the people in the peso and in that institution. Instead of prioritizing the drop in inflation and meeting the goals that had been set, it decided to put the liquefaction ahead of the problems generated by an excessive state. Not only financing it, but for example, issuing to lower interest rates and increase scarce internal credit. It is that the public sector, in its three levels (municipal, provincial and Nation), absorbed to a large extent to finance its enormous deficit, leaving little and expensive for the private sector. With a monetary policy so expansive since the beginning of 2016, it is not surprising that the peso depreciated sharply and, although with some downward trend, inflation was far from the targets set. On the other hand, the mistake of confusing exchange rate arrears with “cheap dollar” due to the flood of foreign currency coming from public debt led to celebrate the increases of the exchange rate generated by the runs against the local currency. Therefore, the BCRA did not intervene or take too long to defend its value with the consequent depreciation of the peso, which was first reflected in the local value of the dollar but was then reflected in local prices.

It is not uncommon that the outflow of capital encouraged by the application of a tax on the financial income of foreigners and international turbulence will be transformed into a strong exchange rate run. The BCRA had to face it without credibility and, on top of that, managed it very badly. The result was a huge decline in the value of the peso and the closure of international financial markets scared by disaster size.

From there, it should be borne in mind that the alternative to the IMF was an economic crisis, at least, from the levels of 2002 that accommodated the excess of public spending to the reality of not having credit. Now, we are in a recession whose primary origin was the impact on agriculture of the drought; but that now adds the de-financing of domestic demand for a large flight of capital and a decline in the propensity to consume and invest product of the enormous uncertainty. The agreement with the IMF has partially solved the financial problem of the national government; but the underfunding of the private sector, the provincial and municipal states still persists.

How do you get out of this? The worst solution is that proposed by some politicians and economists, that the BCRA lower the interest rate. It is not to consider that it is high because there was a contraction of the internal credit for the exit of capitals. The only way I could lower it is by issuing; which would be transformed into a new local dollar rally and another exchange rate run that will be very difficult to stop. The new impulse that will give rise to capital flight will lead to a worse contraction of financing and, therefore, to a greater recession.

So? Let’s ask ourselves what brought us here. A BCRA that did not prioritize monetary stability and lost all confidence in its management. Without a stable currency, it is impossible to think of any way out of the current situation. Therefore, it is good to maintain the stability of the peso as it did until now, because it is the basis for regaining credibility and, therefore, credit for the country. The other thing is that the government gives strong signals that the adjustment of the State is serious (See how https://goo.gl/21YE2Z).

Promises are no longer enough; because the people who bet on those of the last two years lost a lot. Now, they will demand to see to believe. To the extent that the political leadership, government and opposition, act accordingly, we will see that some capital return and dollars are transformed into pesos feeding domestic credit. In addition, the preference to consume and invest will grow again and collaborate with the agricultural sector, good weather through, to get the country out of recession.

Our estimates are based on this scenario that, today, does not stop being optimistic; since both the government and the opposition seem not to have made the best diagnosis of the situation. They continue to trust that they can continue playing politics in the middle of the storm.

2018 2019
        GDP (Var% annual) -0.5% – 0.5% 1% -1.5%
        Primary deficit (% of GDP) 2.6% 1.5%
        Consumption (Var% annual) 0.4% – 0.9%
        Inflation (Var% annual) 30.5% -31.5% 20% – 21%
        Investment (Var% annual) 7% 1% – 1.5%
        Exchange rate ($ / USD end of year) $ 30 – $ 32 $ 36 – $ 38
        Exports (USD MM) 61,000 62,000
        Imports (USD MM) 69,000 68,500
        Commercial Balance (USD MM) 8,000 6,500
        Reservations int. (USD MM) 62,000 61,000
         Unemployment (% active P.) 7.5 7.6

By Aldo Abram
Executive Director, Liberty and Progress.