In October 2020, alternative dollars reached almost $200, and inflation 4% a month for the first time, while the pandemic was throwing up a second wave more dangerous than the previous one and has not yet subsided. In October 2020, the Minister of Economic initiated actions to prop up the elections a year later and faced the emergence of an overall situation quite adverse to his plans; those state of affairs needed rapid movement.
As is usual, the Argentine populist governments gave priority to first trying to mitigate the symptoms and then – if possible without affecting their election campaign – try to outbreak the causes of the problems. They never got to the second act, but they make big announces to conform to the economic agents.
The peso’s sharp fall to almost $200 to the dollar in October 2020 engendered much concern. The value of dollars legally purchased to protect savings outside the country reached $183, with a difference of more than 130% compared to the official price used for imports.
This difference creates operational distortions such as practically uncontrollable over-invoicing of imports of goods and services. It also gives rise to collusion between officials and people in business to importers to ingress while paying with an official dollar of $ 100.
The peso’s value is almost always in crisis (we will not analyse the reasons here and now), but on this occasion, the Central Bank intervened to reduce the differences, using the reserves and succeeded in holding the difference between November and November February in a great job.
In addition to the Central Bank’s operational efficiency, the sale of foreign currency by some individuals to pay an extraordinary wealth tax, and plenty of dollars generated by the grain harvest, significant in volume and prices diluted the expectation of a devaluation and kept the value of alternative dollars so far contained at a discount 70% higher than the official dollar.
Booming grain prices mean $10 billion more in revenues.
The prices evolution of the commodities on international markets was one of the most significant and dizzying external shocks in recent memory regarding speed: in nine months, the cost of maise rose 117%, that of soya doubled, and that of wheat increased by 56%.
This increase in the prices of exportable goods allowed an upsurge in the trade balance unthinkable months ago. The valuation of the 2020/21 coarse harvest implies an increase of more than US$ 10 billion compared to the previous harvest.
The outcomes are positive: helps economic recovery, boosts private spending by the sector and all its agents, generates revenue for the government from withholding taxes, helps reduce the Central Bank’s monetary assistance and consolidates the exchange rate stability needed by the government to improve the chances for the midterm elections.
This aid from nature, the mainstay of the Kirchnerist model since 2007, when the domestic economic policy was already unsustainable, is collaborating with them. Agribusiness is giving another chance to the current administration, which towards the end of last year was heading for a new exchange rate crisis.
The moderate sector of the government will struggle the decision on whether to use this opportunity for the necessary corrections of macroeconomic imbalances or whether the extreme faction of the coalition will gain momentum and align all measures towards the goal of winning the election, increasing the vulnerability of the economy the day after.
The latest developments in economic policy do not leave any room for optimism in this matter. The government’s hints indicate that the soya dollars will once again be consumed in populist style, and the impending crisis will only have been postponed—Will se.
As there are more pesos in the market and more dollars collected, the vice-president will ignore s the finance minister semi-orthodoxy and lift the self-imposed restrictions to sidestep problems and win the elections. Naturally, there will be new problems, with complex relative price distortions and serious post-election macroeconomic issues.
In short: with the commodity prices, the Special Drawing Rights, the tight exchange control and the clever intervention of the Central Bank, there should be no big surprises until the elections. The overall situation is not good and looks pretty unbalanced, but this administration has a good chance of reaching the polls without an external crisis considering the higher export revenues.
Substantial distortions in the economy and the need for a comprehensive programme to reduce the primary fiscal deficit, regulate tariffs and prices that are lagging, and leave all the rest until after the elections. But today, due to the pandemic, the desperate push to change the chief prosecutor and the inflation that plagues the population and the inept politicians, not much more can be asked of this administration.
Management of monetary policy and domestic debt by the Central Bank and the Ministry of Finance since October allowed the difference between the price of the dollar on the free markets and the official exchange rate to be maintained. But this result cannot continue to be achieved without an increase in the interest rate.
Inflation
Inflation in our country is atypical because it presents asymmetric price increases, and the unexpected increase catches the government at the wrong time.
February 2021 added more problems to the macroeconomic mess: colossal inflation, which now reached almost 5% in March and 4.1% in April with a tendency to 5% in May, leads to a still unquantifiable drag for the following month but undoubtedly high.
These percentages are monthly and should not be considered «inflationary index» since they are not generalised price increases; they are asymmetric, with fixed and free prices producing an atypical picture of relative merits.
This monthly price acceleration is unique because it is counter-cyclical. After all, the finance ministry had initiated an austere fiscal policy in January 2021, which was more drastic than expected by the economic agents, with almost no monetary issuance and devaluing the peso at less than half the inflation rate. There were also no wage increases and a significant decrease of genuine pensions, using inflation.
The most likely explanation is political: the influence of the hardline faction in the government is growing. They have upset the finance minister while negotiating payment to the IMF of the 2021 maturities, notifying him that they will not pay these debts to the IMF and Paris Club until after the elections, while he was in Europe with the President negotiating terms of payment. Due to contradictory actions, the outcome of these elections is uncertain, reflected in the value of the alternative dollars, which increased by 5% in 4 days in May.
The following graph indicates inflation increase 4% every month, 3% per month to 2.5% per month and alternative dollars are increasing at a rate of less than 1% per month.
The Central Bank buys dollars and suspends controlled monthly devaluations: in January, they increased the dollar by 4% a month, in April by 1.5% and in May by 1.2%, which would lead to an official dollar of $102 in November 2021. The increase in grain prices accelerated the liquidation of exports, and this made it possible to preserve the value of free dollars, pay local interest and to international organisations, and increase reserves. Since March, net additions have grown by US$2 billion, are now US$5.2 billion and will be US$8 billion in August, keeping the value of free dollars between 60% and 70% above the official exchange rate under control.
There will be an additional increase in reserves because the government will postpone payments to international financial institutions for USD 7.3 billion. The dollars delivered by the
IMF to member countries will also come in, which will increase reserves by an additional USD 4.5 billion.
Relative price decontrol
The high price increases are being corrected – once again – by attacking the symptoms and not the causes. With somewhat vintage criteria, this administration installed strong controls over production and distribution companies. Also, they slowed down the pace of devaluation and decided not to increase tariffs. The government installed intensified price controls to separate local prices from international ones, and other limitations were imposed on meat exports. The limitation (a limitation that will have a minimum duration, given the reaction of producers and the particular weakness in sustaining the decisions of this administration) and also they tried to impose a very novel concept for universal economic theory: the very high inflation is due to «market failure».
Inflation does not depend on a permanent mismatch between price increases and the production of a given quantity of goods and services; such a concept is academic and partial. Prices are not simply the result of a comparison between the mass of money available for the demand for goods and the number of goods and services accessible but are the consequence of several factors – in addition to the goods/money mass ratio.
In the formation of prices, an important role is played by transactional speed, the expectations of producers and consumers, the degree of efficiency with which the economy meets those expectations, the complex interaction of money-generating variables, consumer propensities, the way their income is used, the behaviour of firms, and hopes of all kinds, amid an all-distorting pandemic.
A Brown graduate, also visiting professor at Columbia, endorsed by a Nobel prize winner, publicly sustains that a market intervened by the state «fails» and that non-described failure is the cause of the inflation. Such a scholarly claim is at least debatable and requires a conceptual expansion. In any case, what would fail would be the way of intervening in the market. Minister must clarify whether the market falls or if intervention made the market flop.
No single measure can contain price growth. No one has ever succeeded in doing so. What is certain is that neither this administration nor the previous one has tried to reorder relative prices due to the political, business and trade union interests that politics, now that it has failed to align for generations, has not succeeded in doing so.
The scholarly claim «the state spends more than it takes in and generates permanent deficits borrowing and issuing money» is an oversimplification, even if it is true. But that is consequential, not the cause of inflation.
Inflation is evil in place for generations in the internal structure of the Argentine economy. There is an organisational problem of the economic organism that has generated inflation for decades. We have prepared a paper on this subject, available to our subscribers.
Prices will continue to rise sharply, and however private sector incomes will not.
CPI increased by 17.6%, during the first quarter and after the first half of 2021. It already exceeds the 29% included in the Budget for the whole year.
In May, it will not be less than 3.5% per month. Despite all the existing controls, without tariff increases and wage increases, the year will not show an inflation rate of less than 50%. And if the unions take advantage of the need for elections, price increases will be much higher.
The individual projections of the leading consulting firms and banks estimate price rises above 50%:
BBVA Argentina (50%), Invecq Consulting (50%), JPMorgan (50.4%), FIEL (50.4%), Moody’sAnalytics (50.5%), Credit Suisse (50.5%), EcoGo (50.5%), Quantum Finanzas (50.8%), OJF & Asociados (51.4%), S&P Global (52%), UBS (54.9%) and Econométrica S.A. (59.5%). (59,5%).
Understanding asymmetric inflation is rather complex.
The theory and analysis of economic history leave no room for doubt that monetary issuance impacts prices, but it is not very serious about predicting the timing because it depends on other variables. However, in-depth analyses in economies with different inflation levels do not deliver precise information on the time over which excess money supply impacts prices. The only assertive conclusion would be that the higher the inflation rate, the faster the pass-through prices. The monetary overflow of last year is already upon us, when it may not have been noticeable, but now it is prominent in fees even if it is not the only factor.
This vast inflation generates a not very encouraging panorama due to the need for issuance in the face of the impossibility of accessing a market of highly high global liquidity, the open confrontation of factions within the current administration, the prioritisation of the judicial needs of the vice president before any other, in a context of a genuinely worrying health crisis with an intense second wave and no vaccines.
The health problem tends to worsen daily.
The most severe problem, the one that worries the population and politicians as a whole, is the second, intense wave of COVID, which is advancing with a ferocious acceleration in the number of daily infections, currently in the order of 32,000 per day.
The number of deaths due to COVID concerning the total population is disastrous: it puts Argentina in the unfortunate first place globally in fatalities per million inhabitants. Moreover, 68.3% of patients admitted to intensive care for COVID die.
The actual number of those infected is unknown, although it is manipulated because it directly functions the number of tests performed. Although statistically, the number of deaths can be managed, as is done daily in the hyper-overestimated (only by the President) Province of Formosa, the reality always prevails because no one can hide a death.
The new wave of COVID did not come as a surprise to scientists working for the government. Nevertheless, cases have risen from a daily total of 5,000 in early March to 35,000 this third week of May 2021 amid restrictions that nobody complies with and one of the lowest vaccination rates in the world.
With the new variants circulating, patients are much more at risk and younger: a large number of recent victims in the most specialised hospital were under 42 years old when they died, and many young patients no longer respond effectively to oxygen treatment.
The second wave of COVID cases caught the government off guard, with relaxed restrictions and no vaccines, only promises, something that should not have happened. Cases have risen from a daily total of around 5,000 in early March to a record 35,000 in May, while deaths rose from 112 in early March to 744 on Tuesday 18 May. On Wednesday, 19 May, daily infections reached almost 40,000 cases, while deaths fell to 494.
The figures place the country in third place in daily cases after India and Brazil, and fourth in the world in COVID deaths, also after India, Brazil and the United States. Considering that India has 1,326 million inhabitants, the United States, 332 million and Brazil, 211 million, and Argentina only 44 million inhabitants, the outcome regarding the number of deaths is devastating, although it sounds unprofessional is terrifying.
Relative to population, Argentina now has the highest number of COVID deaths per day in the world, with 16.46 COVID deaths per million on Tuesday, far surpassing our giant neighbour Brazil, which recorded 11.82 per million. That’s 40 per cent more.
The only way to know with any degree of certainty the number of positive cases is the percentage of infected concerning the number of tests performed. Unfortunately, this ratio is that 35% of the tests are positive. If the number of trials was much higher – as it should be – such as 200,000 per day, our country would have almost 70,000 confirmed cases daily. If such transportation were correct – which is entirely possible – a collapse in therapies can be estimated within 30 days unless the number of infections drops abruptly.
Since the possibility of syncope of the hospital system in Buenos Aires, which would be very damaging for the outcome of the elections, this administration imposed further restrictions on movement and activities that it will not enforce.
After more than a year of back and forth, jurisdictional conflicts and confrontations within the government, the middle class, lower-middle class and the self-employed and unregistered workers have generated resistance. But this already devalued government no longer has the resources to enforce anything socially. They already consumed its best fungible resource: the complete and voluntary compliance when there were 100 cases a day. It will no longer happen unless there is absolute chaos, which would change the current mental paradigm of the population.
The blame for this lies with officials – all politicians – and the politicisation of the pandemic. November’s legislative elections generate fights of aspiring legislators openly in the opposition and the government. The opposition coalition disagreed with some of the restrictions the populist administration has tried to impose, arguing that school closures are unnecessary, but the jump in confirmed cases of 40,000 a day made them think twice and not expose themselves to the backlash from the population, where they are rapidly losing addicts.
From 22 May, Argentina returns to phase 1: total traffic restriction, the ban on meetings, suspension of classes, sports, closure of all shops for nine days and also during the following weekends. This measure was already taken more than a year ago when there were 100 cases per day, and as can be seen, it did not work. The mega incompetence of the authorities is astonishing.
Nevertheless, politicians, obviously vaccinated, discuss how to solve the vice-president’s judicial problem, change the chief prosecutor to achieve this, and raise money to prop up election campaigns.
Vaccination is virtually at a standstill, with only 18% of Argentines have received at least one dose so far, mainly Sputnik V and Sinopharm, while AstraZeneca has promised to deliver 4 million doses the end of May but has so far never delivered.
If restrictions are maintained, and people are slowly vaccinated, the outlook is not good, and there is no reason for hope if conditions do not change.
Government Incomes and expenditures
The electoral panorama for the government is uncomfortable, and that is why the faction that responds to Mrs Kirchner – which is the dominant majority in these internal elections – has initiated a process that implies much greater government spending.
They have identified resources because revenue collection has improved, and they have also been able to place some debt securities on the market, with additional dollars from Special Drawing Rights from IMF and exports.
They will take advantage that revenue is growing well: in April, it increased by 40% in annual terms and improved by almost 20% in real terms in four months, all because export taxes provided $193 billion in the first four months, a 103% annual increase in absolute terms and will reach $1 billion, which favourably compares with the $386 billion in 2020. A good gathering of wealth tax $104 billion of the $223 billion to be collected in five months.
It seems complicated – despite these figures – that during an increasingly severe pandemic, any action can increase peoples incomes through social assistance and without tariff adjustments. The priority in an election year is to ensure that pensions without contributions and minimum pensions, social plans and state salaries do not lose too much against inflation.
Also from the Instituto Patria (a supposed think tank of the vice president), obviously learned that there are more dollars due to purchases made by the Central Bank in the foreign exchange market and the eventual delivery of the extra USD 4 billion in SDRs from the IMF that would correspond to Argentina.
That is why they ask that these resources should not be used to pay international debt maturities with the IMF throughout the year and that these funds should be used to finance government spending to prop up the elections. The resulting big problem is that using SDRs to finance the uncontrolled spending of a populist government generates monetary emission because the expenditure is in pesos.
On the other hand, defaulting on payments to the IMF is neither sensible nor advisable.
Fiscal accounts are misleading.
During 2020 the primary fiscal deficit increased by 734%, from $218,000 billion in 2019 to $1,818,000,000 billion in 2020. The budget target for 2021 was $1,568,000,000,000 million pesos, a reduction of 15%. The Minister had positive results in the first three months of fiscal adjustment.
The reduction in the primary fiscal deficit, comparing January, February and March 2021 with the same months in 2020, was 35%. The April figures were 100% higher than in the same month of 2020.
Before this return to phase 1, the administration expected this behaviour of the fiscal accounts to continue in the coming months, which could lead to an over-achievement of the primary fiscal deficit reduction target.
But the fiscal adjustment is a consequence of higher tax revenues and lower social assistance payments, compared to the rest of public expenditures that are adjusted. These behaviours are a consequence of the effect of much higher inflation than budgeted.
The 56% increase in tax revenues in the first quarter of 2021 is due to an 84% increase in taxes and only a 20% increase in pensions and social services.
The difference in income comes from:
- increase in agricultural deductions due to the effect of the monthly devaluation and the increase in export prices;
- creation of new taxes and the growth of existing taxes; 3. of the rise in inflation from 2020 until March 2021 and
- of pensioner increases well below the rate of inflation.
The 41% increase in primary expenditures during the first three months of 2021, lower than the 63% increase during 2020 compared to 2019, is because there were far fewer and much lower increases for social security benefits (29%) and public sector wages (31%).
Increases in spending on goods and services – 87 per cent – and losses in state enterprises – 96 per cent – indicate that lower spending is not the result of structural reform of the public sector but wage and pension adjustments well below inflation.
The 54% increase in subsidies paid to avoid utility rate increases is higher than the average increase in expenditures. It may go much higher due to the vice-president’s opposition to authorising increases that would allow the President and his Minister to maintain the amount budgeted by the President.
Consequently, the fiscal accounts – which appear to be much improved – should not be seen as progress towards budgetary balance to embark on an anti-inflationary programme. On the contrary, this administration needs inflation to remain very high to continue collecting the inflation tax and the other indirect taxes that also feed on rising prices.