This article was published in Infobae on July 9th, 2021.
As the second half of the year begins, the agenda of argentine politicians will be marked by a temporary and short-term focus on winning the legislative elections. Economically, the burning concerns of the people will prevail over solving substantive issues. In this context, we could say that there are three emergencies. These emergencies are linked to inflation, the exchange rate, and the lack of economic activity.
Economically, the burning concerns of the people will prevail over solving substantive issues.
Politicians will likely be more decisive on the first two variables (inflation and exchange rate) since failing to control them could be very expensive in electoral terms (and of course, also in economic terms). On the other hand, the level of activity will see a partial rebound after the sharp fall in 2020. However, the concern that it is losing steam continues to be latent.
Within this framework, the next inflation figure will be eagerly awaited. Although it will be lower than the levels experienced in recent months, it will still be high, probably between 3 and 3.5 percent. Looking ahead to the elections, the government will make an effort to patch the economy in order to get inflation to fall below the three percent threshold and begin to change expectations. However, we must not forget that the level of repressed inflation is high and that the government is financing itself through domestic debt. If for some reason domestic debt financing is no longer an option, the pressure on the issue will be great, this being the most likely scenario. In addition, we must take into account that the remunerated debt is almost 130% of the monetary base.
However, we must not forget that the level of repressed inflation is high and that the government is financing itself through domestic debt.
The monetary exchange market will also face pressure, as it does in any election. At around USD 7 billion, net reserves are low and liquid reserves are even more scarce at around USD 2 billion. In this sense, it is a great relief for the Argentine Central Bank (BCRA) to know that payments to the Paris Club have mostly been postponed. On the other hand, the BCRA and the FGS still have dollar bonds which will allow them to intervene in the financial dollar market if necessary. The exchange rate will probably see a bullish path between now and November, but this path will be without major surprises. The big question is how much longer the post-election foreign exchange market can hold out.
Regarding the concern to avoid stagnation in terms of economic activity, the government will seek to “put money in people’s pockets”. This may be the wrong strategy. The main problem is that the extra money would have some utility if the economy had been previously producing. The problem with Argentina is that, since 2011, it has found itself with a stagnant and declining economy and, therefore, it is not producing any goods. In short, if there is no production of goods, there is no need to consume. It could have some short-term effect, which would align with electoral objectives, but it will be far from being a solution, especially in a bi-monetary economy with weak demand for pesos as is the case in Argentina.
Finally, another issue that will have to be resolved is the debt with the IMF. Pre-election, we face maturities between September and December of approximately USD 4.5 billion. However, thanks to the fact that the country will be receiving SDRs of approximately USD 4.5 billion, we can expect this will be used to pay off the 2021 maturities to the IMF. If this happens, as these funds come in, they would return to the IMF. However, the toughest Kirchnerists probably want to use these funds to attend to other emergencies, for example, the exchange market.
With regard to our post-election relationship with the IMF, the scenario is more serious since the negotiation is still pending and now has worse prospects. Remember that in 2022 around USD 20,000 million will expire and Argentina is not in a position to pay.
To end its decline and growth cycle, Argentina must present a plan that is credible and gives confidence in its future. The current government is a long way from providing the levels of confidence that are needed and the negotiation with the IMF, which is a key starting point, is quite stagnant.