INFOBAE – Let’s define what orthodoxy is. Beyond its link to religious positions, the term “orthodoxy” for the case that concerns us refers to economic policy that conforms to the principles of economic science or that complies with its traditional norms or practices, generalized and accepted by the majority. of the economists who make up the profession. In a few terms, “orthodoxy” in economics is linked to fiscal, monetary and exchange “balances”.
The government that takes office in December 2019 has been extremely heterodox in facing the economic and health crisis. On the fiscal front, although it inherited a situation of relative primary fiscal balance, it expanded spending with multiple subsidies to various sectors of the economy, leaving a very weak situation for 2021, with a primary fiscal imbalance of approximately 10 points of GDP. It is difficult to find a history of such an imbalance.
Without access to debt, the government monetized this deficit, leaving us with a monetary imbalance that it can temporarily resolve by absorbing these surpluses with Leliqs, but with risks of high inflation and an exchange crisis for the medium term.
The exchange rate issue is linked to the monetary issue, and although the exchange rate at the time of assuming seemed balanced (in the words of the President himself), the economic and health crisis, plus the fiscal and monetary imbalance, leave a series of problems for the next few months that will surely impact the nominal exchange rate.
In summary, the heterodoxy of the government can be observed in a strong fiscal, monetary and exchange deficit, beyond which certain analysts justify it because of the health situation, faced with the controversial universal quarantine policy, which cut economic activity and employment, negatively impacting the collection.
The natural course of events is beginning to change, not because the government has done too much, but because we seem to have hit rock bottom. The second quarter showed the largest drop in activity, impacting an estimated 29% unemployment for the middle of the year. But from then on, as the universal quarantine measures began to be relaxed, the economy began a rebound that was replicated in practically all the economies of the world. From that second quarter floor, yes, Argentina is better; But compared to December 2019, or even better against March 2018, which was the last peak of activity, Argentina still has a lot of room to recover.
These last days received some good news globally. Some laboratories are beginning to show some success in developing a vaccine that could solve the health issue in the medium term. European stock markets showed some optimism, for example, after the Pfizer news.
In turn, the global economy is also showing an accelerated rebound with job creation, as quarantine restrictions are being made more flexible and in some cases completely dismantled.
Commodity prices are beginning to recover, and in some cases reach higher peaks than those seen in recent years, which may contribute to recovering a certain optimism regarding the currencies that can be acquired via exports.
On the Argentine side, yes, there was a good sign (perhaps fundamental) in stopping the land grabs. A key institutional aspect that generated some optimism in the market that Argentina will not be Venezuela, but I wonder: Have we fallen so low to think that this is a turn to orthodoxy?
Well, it’s not just that. The government offered a budget for 2021 that proposes to reduce the fiscal imbalance practically by half based on an improvement in collection (natural due to making quarantines more flexible and recovering activity), and for partially cutting the IFE since it would no longer be justified by the new reality. But even if it were to be fulfilled – which many doubt for the election year – a fiscal deficit of 4.5% of GDP still persists that will need to be monetized.
Well, someone will say that it will not necessarily be necessary to monetize, because the government has now turned to the debt market, and places bonds -with attractive yields in dollars- that allow the exchange market to calm down. Bonds in dollars to form reserves and bonds in pesos to absorb those surpluses that could continue to demand foreign exchange.
At the same time, the government changed the pension formula, and yes, that may generate some tax savings in 2021 compared to the previous formula, but we must also point out that the update formula does not seem to be very orthodox, if we take into account that no country The world administers pensions in this way.Finally, the IMF visited Argentina and pressed for Argentina to resolve once and for all the fiscal, monetary and exchange rate imbalance, advancing in a series of labor, pension and tax reforms, which also include a comprehensive reform of the state. That path is the only one that could give Argentina the possibility of avoiding a new default when the next government starts in 2023. But this is an agenda that Guzmán wants to avoid, and that will make the agreement difficult.
In short, there is no turn to the orthodoxy of the government. We hit bottom in the second quarter, and activity rebounded as the universal lockdown eased. That rebound will follow in 2021, and there will surely be “recovery”, but no “growth” for many years. The fiscal issue continues to be very serious, even with the change in the pension formula that leaves millions of pensioners in misery. The monetary issue is a time bomb, and it will be even more serious with the 2021 monetization whose magnitude cannot be specified today. The exchange issue, although it shows a transitory calm due to the conjunction of the aforementioned factors, will be very difficult to sustain over the months, as maintaining the surplus pesos in Leliqs has an economic cost that the government cannot pay, and that will get worse by its own “snowball” formula.
An agreement with the IMF seems important in this Argentina. But that will require, it seems to me, a turn to orthodoxy that – for now – the government does not wish to give.