Argentina and its complex economic puzzle

The increase in Argentina’s interest rate to 97% is a testament to the Argentine economy’s difficulties.

It shows how difficult it is to balance a scenario of devaluation, inflation, and declining growth.

After Zimbabwe, Argentina has the highest interest rate in the world.

The 150% that the African country’s banks pay for the money deposited in their funds is a mockery of the nominal annual rate (NAR) of 97% (8.08% per month) that the South American country has had since Monday, May 15.

But statistical records aside, what is certain is that all this shows that the Argentine economy is going through delicate times.

“The nominal rate of the economy is getting higher, and the real rate is still negative because the interest rate is increasing by 8%per month in nominal terms, and the inflation rate in April was 8.4%.”

“In short, the Central Bank is running after inflation and adapting to the new nominal interest rate,” Martín Tetaz, economist and national representative of the Radical Civic Union for the Autonomous City of Buenos Aires, told the foreign radio station of the Federal Republic of Germany Deutsche Welle (DW).

Three weeks ago, the rate was 81%; two weeks ago, it was 91%; and today, it is close to 100%.

“The rate increase is a reaction to the inflation figures, which are not in line with the government’s expectations,” Leandro Mora Alfonsín, an economist at the University of Buenos Aires (UBA), told DW.

With this increase, the expert said, they are trying to “encourage deposits and absorb circulating currency to prevent the dollarization of portfolios.”

Mora Alfonsín points out that the economic conundrum is very complex.

“Although this is the second increase in a short period, the interest rate is still below the level of inflation.”

“This is because the above objectives coexist with the objective of not affecting the activity level.”

NO POLITICAL SIGNAL

With a currency that has lost half its value against the euro in the last year and inflation that reached 94.8% last year – and totals 30.1% in the first four months of 2023 – the Argentine economy has no prospect of improvement in the short term.

The International Monetary Fund (IMF) forecasts growth of 0.2%in 2023, while the country’s external debt stood at nearly US$277 billion at the end of 2022.

Foreign exchange shortages, a dollar with a dozen different exchange rates, and little credibility in the financial market make managing the South American country’s finances even more difficult for Minister Sergio Massa.

Tetaz believes the measure officially announced Monday (15) “does not represent a political signal. People do not understand what this new tax means.”

“It gives the impression that the government has no plan and is not announcing a concrete package to solve or address the main cause of inflation, which is the lack of independence of the central bank.”

“In short, politically, it is a zero announcement.”

INVESTMENT, A DANGEROUS GAME

Mora Alfonsín believes that “it would be ideal for establishing a comprehensive stabilization plan that promotes the convergence of the economy’s macro prices (exchange rate, consumer price index, wages, interest rates, and tariffs).”

“Such a plan consists not only of measures but also of consensus, political articulation, and deadlines.”

“The last point is particularly important as elections are coming up in Argentina,” he reminds.

Primary elections (PASO) will be held on August 13, and presidential and legislative elections will be held on October 22. Argentine Vice President Cristina Fernández de Kirchner said Tuesday (16) she would not run for president in the elections scheduled for October, claiming that the country’s judicial system would disqualify her after her high-profile corruption case.

“For a stabilization plan to succeed, deadlines must be set for its phases, which is difficult to achieve today for a government whose mandate is in its final months,” she said.

Whoever wins in the elections at the end of the year will have the horizon and the political support of the electorate to present such a plan, which will have a better chance of success,” the UBA economist believes.

And with an interest rate of 97%, the temptation to invest in Argentina is strong.

Is that a good idea for a foreign investor?

Of course, the high interest rate is attractive for anyone coming from abroad, especially if the government is trying to use the dollar as an anchor.

That’s always a risky gamble because everyone knows it can’t last forever, and the government will devalue at some point.

When that happens, the person who bet on that advantage loses,” Tetaz explains.

And he adds, “Those who like to play the empty chair game can take advantage of that.”

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