Argentina government enters election campaign with currency and economic key data out of control

RIO DE JANEIRO, BRAZIL – Since the beginning of the year, almost everything that could have gone wrong for the government in the run-up to the general election has happened.

A few days before the ballot, the blue dollar (unofficial rate) has reached record highs, sovereign risk is at its highest level since the last debt swap, inflation continues to rise, and an agreement with the International Monetary Fund (IMF), which would be something of a balm for the markets, still seems a long way off.

“There is not a single indicator that is doing well right now. Perhaps the only problem is the part of economic activity where it is difficult to distinguish the extent to which the upturn is due to the ending of the Covid-19 restrictions rather than current economic policy.

The vast majority of indicators is bad, and I think that after the primaries, the government’s strategy of improving its chances by expanding fiscally only exacerbated the problem. We will see how the policy responds starting next week. Still, the situation has deteriorated sharply in the last two months since the PASO [primary elections],” Camilo Tiscornia, director of C&T Asesores Económicos, told La Nacion newspaper.

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1. POLITICAL UNCERTAINTY AT THE TOP, PREVENTING ECONOMIC STABILITY

For Elisabet Bacigalupo, head of macroeconomics at Abeceb, today’s economy has “no anchor at all.” All fiscal, monetary, and exchange rate variables are “in disarray.” Most importantly, the country lacks a fundamental anchor that keeps expectations in check: the political anchor of “anticipating the future course.”

“The government suffered a heavy defeat in the primaries and still has many issues to resolve. It was weakened against a backdrop of severe tensions in the governing coalition, internal differences, and differences in self-diagnosis. Today, uncertainty is at its greatest, as it is unknown what political course it will ultimately take. It lacks the first anchor, which is politics, the mother of all anchors,” she remarked to La Nación.

2. RISING EXCHANGE RATE PRESSURES: GAP AND DISTORTIONS

As a result of “extreme policy uncertainty,” macroeconomic imbalances are reflected in the foreign exchange market. This week, the blue dollar has risen by ARS7.50 and is selling at ARS206.50, the highest nominal value ever recorded. The “free” financial dollar, which is not subject to government intervention, has also been pushed up and is trading above ARS112.

The biggest problem is that the gap between the parallel exchange rate and the official wholesale dollar is already over 106%, creating distortions.

“The exporter who has to sell at ARS100 when he knows the dollar is at ARS207 is trying to liquidate as little as possible, and there is an incentive to under-invoice. Those who have to import are the other way around; they try to buy now in the official market because they know that the wind can change at any moment, which is why the Central Bank (BCRA) is trying to limit the prepayment of imports,” Tiscornia explained.

For Bacigalupo, the 100% gap is “unsustainable.” In the past, the gap was rarely in triple digits. “In the 1970s and 1980s. Very punctual moments, but the distance is usually lower in times of tightening. It takes into account the amount of high uncertainty,” she added.

3. THE TENDENCY OF THE EXCHANGE RATE LAG

This is also related to the previous point. At the beginning of this year, the government anchored the exchange rate, and it moved at a rate of 1% per month, well below inflation. According to economists, this is unsustainable in the long run, as it will deepen macroeconomic imbalances.

“The million-dollar question is what are they are going to do with the exchange rate after the elections, but they have to do something because competitiveness is being lost. It starts an exchange rate lag that always ends badly sooner or later. I don’t rule out that they will continue to push the dollar back; the only question is how they will do it: will they take a 20-30% jump to correct it, and that’s it, or will they devalue faster every month? I’m leaning towards the latter,” argued the director of C&T Asesores Económicos.

4. RESERVES “ON THE GROUND”

Due to high commodity prices and a good harvest, the Central Bank increased its reserves in the year’s first half. But with June, the situation changed drastically. According to the consulting firm Equilibra, gross reserves have fallen by US$3.072 billion since September 12 (PASO) to date.

Net reserves, meanwhile, fell by US$1.030 billion, even though US$300 million in loans from multilateral organizations have flowed into the country, and another US$295 million from the CAF has yet to be settled.

“Since the primaries, the Central Bank has sold US$600 million in the spot market, US$800 million in the parallel market, and at least US$4 billion in contracts in the futures market. Nearly US$5.5 billion between the three markets: Spot, Parallel and Futures,” according to economist Fernando Marull, partner at FMyA.

5. COUNTRY RISK PEAKS AFTER SWAP

Like the dollar, country risk continues to rise. The index compiled by JP Morgan closed Thursday at 1753 basis points, up 0.9% from the previous close. This is the highest level since the debt restructuring in September last year. “It means that the market does not believe in an agreement with the International Monetary Fund,” Marull said.

Beyond the index, Bacigalupo argued that Argentina has “fallen out of the world’s eye.” In the background, country risk warns that the implied probability of default in the near term is “high.” Combined with other indicators, Argentina has “a limited fiscal window,” and considering the dollar debt coming due in the next few years, the amounts the country will have to bear are high.

“How will Argentina raise $8 billion to pay the maturing bonds? The only option is a severe fiscal program and thus access to global credit markets.

6. INFLATION THAT WON’T LET UP

Not even the price freeze was enough to contain the general increase in prices, which amounted to 3.5% in October. On Thursday, it was confirmed: Inflation has not stopped growing. Since the beginning of 2021, the consumer price index has increased by 41.8%, for the last 12 months it is 52.1%.

“The pseudo-anchors that the government pretends to use, such as freezing tariffs and prices, are ultimately bread for today, hunger for tomorrow. Or rather, hunger for today,” ironized the head of Abeceb’s Macroeconomics Department. Tiscornia agreed, noting that all these measures only “drive the problem.” At some point, they will have to be corrected and will provide more reasons for inflation to rise further.

7. DEFICIT FINANCED WITH EMISSIONS

According to economist Marull, the government has spent about $600,000 million to finance the government accounts since the primaries. “This is the famous Plan Platita. The country lost its real financing and had to spend money,” he noted.

“Spending money and the budget deficit is central to inflation. It’s not seen tomorrow, it’s not that immediate, but it will unfold over time and eventually it will hit, although other things seem to be more controlled, like tariffs and frozen prices,” Tiscornia said.

8. REAL WAGES ‘PULVERIZED’

Yesterday, Indec reported that wages rose 0.5% in real terms in September, the third consecutive month of gains. However, they are still negative year on year, falling by 0.9%. And if we look even further, the situation is deteriorating and is “at a historically very low level.”

“Since the peak in November 2017, wages have fallen in real terms for 46 months, representing a loss of purchasing power of 22% on average. The most affected are informal workers, for whom the real loss is 35%, while for formal workers it is 18%,” according to the analysis of the consulting firm LCG.

The consulting firm Abeceb believes that the first political reactions and economic definitions will be felt after the elections. The “hope” is that the government will use the agreement with the International Monetary Fund as an “anchor to order expectations and contain the collapse.”

“The government will not eat glass. This idea of political survival instinct will make them not do anything stupid, probably not to become extremely radical and agree with the IMF. That’s why we see a mixture of moderation and radicalization because it’s in their DNA to continue with the brackets, restrictions, and interventions. But some fiscal consolidation, a commitment to reduce monetary financing, no further devaluation below the inflation rate – those are some of the things we expect after the elections. They will not try to commit suicide because the economy is weak and needs a big, unstoppable service,” Bacigalupo concluded.

With information from La Nacion