Argentina’s time bomb: Massa will leave an economy in recession, record indebtedness, and an exchange rate gap close to 100%
The program launched by Sergio Massa in August 2022 was limited to three main issues: tightening price controls, raising nominal interest rates, and accelerating the pace of indebtedness of both the National Treasury and the Central Bank (BCRA).
None of the three factors stabilized the macroeconomy, but the consequences are being felt.
The BCRA’s interest-bearing liabilities reached the outlandish sum of $10.6 trillion, equivalent to 200% of the monetary base and close to 12% of GDP.
Still, it has already reached its limit.
What at first was a transitory mechanism to stop inflation progressively turns into a time bomb that threatens to generate the opposite effect.
INTEREST-BEARING LIABILITIES OF THE CENTRAL BANK (BCRA) AND EXCHANGE RATE GAP
The withdrawal of pesos from the financial market is not fortuitous; it requires monetary issuance to pay interest on Leliqs and Pases.
This sum of interest amounted to $3.38 trillion in 2022, or the equivalent of 3.82% of GDP, the so-called “quasi-fiscal deficit“.
The virtual disarmament of this deficit implies a major inflationary cost for the future, a problem of monetary surplus that will eventually have to come to light and bring prices to the surface.
Although Minister Massa complied with the fiscal targets with the IMF, if the quasi-fiscal position is added, the imbalance did not decrease.
Any improvement in the primary deficit was more than offset by the increase in the Central Bank’s interest payments.
For stability purposes, the fiscal deficit went down, and there is no expectation that it can go down in 2023.
In fact, if the BCRA‘s liabilities continue to pay an effective annual rate of 107% (as denoted by a nominal rate of 75%), then the debt position would represent up to 290% of the monetary base by the end of the year, a completely unsustainable figure never seen before in Argentine history.
Expectations discount an increase in the quasi-fiscal deficit and higher inflationary pressure by 2024.
The National Treasury accumulated a debt of up to $18 trillion, 65% of which is in the hands of other public sector entities such as the Central Bank or the ANSES.
The remaining amount is distributed among financial entities and private entities sector agents.
The government has had to resort systematically to indebtedness in pesos in the local market due to the closure of the international capital market for Argentina.
The accumulation of maturities in short periods of time is the main unbalancing factor of the Treasury’s debt.
The first run against government securities occurred between June and July 2022. Since then, the Treasury has had to undertake tender after tender to postpone short-term payments to clear the uncertainty, but at the cost of dramatically raising implicit interest rates.
Most of the maturities of the debt rolled by Massa will fall between February and March 2024; the Minister limited himself to postpone the exclusive financial needs to 2023.
The mere insinuation of an eventual “reprofiling” of the debt by the possible presidential candidates could unleash another run like the one the country suffered in the middle of last year.
As if all this were not enough, Massa’s program looks completely exhausted, and the only modestly positive results achieved at the beginning of the administration are already beginning to give way.
The exchange rate gap returned to 100%, considering the parallel dollar segment and the official parity.
The currency gap generates severe pressure on the sustainability of the exchange control system.
Still, it also hides a parameter to measure repressed inflation and the disorder of relative economic prices.
The eventual exit from this exchange rate scheme will produce a shock in the price of tradable goods, thus disclosing an important amount of inflation that has not been recognized until now.
The backwardness of the real level of public utilities also constitutes an important time bomb that the Fernandez administration will leave behind, despite the adjustments made by the Minister of Economy last October.
With information from Derecha Diario
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