Brazil’s leading bank predicted more inflation and lower activity levels for Argentina

Brazil’s Itaú bank estimated that Argentina would present a scenario with higher inflation and lower economic growth.

In a report of its analysts, the Brazilian entity praised the guidelines of the new Minister of Economy, Sergio Massa, even though it considered that it is necessary to know the more precise guidelines of his stabilization plan, in tune with the questionings of banks such as JP Morgan.

“Massa appointed a team of moderate economists with experience in the public sector, including the key area of Energy. He is sticking to the IMF program. Although he did not mention details, faster and broader elimination of subsidies, a reorganization of social plans, and an administration of budget quotas would be the main tools,” they said.

“The minister stated that the Treasury would not take any more financing from the Central Bank for the remainder of the year (so far this year, it has amounted to 0.8% of GDP, against a target of 1% for the whole year).”

Also, “a voluntary debt swap was successfully carried out to settle short-term domestic maturities (an average of US$1.8 billion per month in private hands).”

“It seeks to increase international reserves. Massa informed that an agreement was reached with the agricultural sector to advance the liquidation of exports by US$5 billion in the next 60 days. However, the terms of the agreement are not yet known.”

“International agencies would disburse US$2 billion,” according to the minister. He also revealed that “repo operations are being studied to reinforce reserves and repurchase foreign currency debt”.

Finally, “the minister affirmed that he would work to reduce the gap in the parallel foreign exchange market”. “The new minister’s initial statements go in the right direction, aiming at fiscal consolidation and increasing international reserves”.

THE DETAILS

“However, key details are missing. The outlook remains extremely difficult due to low international reserves (approaching zero in net terms), the magnitude of imbalances, and the proximity of presidential elections.”

“The political capacity to carry out the necessary fiscal consolidation and tighter monetary policy, and eventually a readjustment of relative prices, which could engender a bout of corrective inflation, will be tested sooner rather than later.”

However, “political analysts do not rule out a scenario in which, pressured by the prospects of an electoral defeat in 2023, the leaders of Kirchnerism will keep silent, giving Massa valuable space.”

“Maintaining the ‘crawling-peg’ policy -while international reserves are low- is challenging. Despite a more moderate approach, with more political support, macroeconomic imbalances and relative price misalignment are large and will likely need tighter economic policies, which are often difficult to digest politically and more challenging with an electoral cycle about to begin.”

“We see risks of even lower activity and higher inflation for 2022 and 2023. Our baseline scenario is modest GDP growth of 2.5% this year and 95% inflation (85% in our previous scenario), and we expect a 1.5% contraction in activity (0% previously) and 95% inflation next year to follow.”

In this context, said Itaú, “increasing reserves will be difficult. Net international reserves fell by US$4.4 billion to a low of US$1.3 billion between June and early August, due to heavy interventions in the foreign exchange market and payments of external obligations (mainly with the IMF).”

“The gap – despite some recovery following Massa’s appointment – remains above 100%. We note that incentives for exporters to advance settlements are a short-term bridge and do not solve the unsustainable official exchange rate problem. In addition, there are uncertainties about the viability of a repurchase agreement with international banks and sovereign wealth funds.”

“The rate and collateral required will likely be high due to a country risk premium of 2,400 basis points (EMBI index). We expect the Central Bank to further accelerate the pace of depreciation, to around 6% per month, to reach ARS 180 per dollar in December.”

“The root of the imbalances is the fiscal deficit and its monetization. We estimate that the cumulative primary deficit in the last 12 months to June increased to 3.3% of GDP (from 3% in December 2021), driven by strong spending growth.”

With information from Infobae