The economy, in electoral mode: the dollar has woken up, inflation remains firm and the reopening of parities is approaching

The question is no longer whether inflation in 2021 will be 29% higher than forecast in the budget. Nor if it will be similar to the 36.1% recorded last year. In reality, The stake is to know if it will exceed the 53.8% recorded last year of the government of Mauricio Macri, in 2019. Some private reports, such as the one prepared by the brokerage firm TPCG, which strongly reaches out to foreign investors, suggest that this year inflation could end the year at 57%. Others consider that it will be “comfortably” above 50%. Either way, the revisions are bullish.

However, society seems to be much more accustomed to these values ​​than in the past. As the former head of the BCRA mentioned, Federico Sturzenegger, social tolerance to inflation has increased considerably. Perhaps so many years at very high levels are at the root of this phenomenon. It is astonishing that in ten years Argentina’s economy has gone from a “cruising” inflation rate of around 25% to an environment closer to 50%, exactly double that.

The very high and persistent inflation in Argentina has collateral effects. It destroys the purchasing power of wages and plunges more and more people into poverty, since families do not exceed the floor of the basic food basket, today around 62,000 dollars per month. But at the same time, the government obtains an exceptional source of revenue thanks to the application of the “inflationary tax”, which contributes, even partially, to reducing the budget deficit.

The cruising speed of inflation has doubled in ten years: it has gone from 25% to 50%. The company seems tolerant despite the collapse of purchasing power and the government takes the opportunity to collect the “inflation tax”

Martin guzman He promised 4.8% in March would be the highest level of the year. And although there are already two consecutive losses, the decline is slow. In April it was 4.1% and in May it was between 3.5% and 3.8%. In the first five months of the year, the cumulation will already be close to 22%.

The government sees conspiracies everywhere. He blames the meat, the “unscrupulous” entrepreneurs, the monopolies or whoever he finds first as a scapegoat. Officials do not understand how despite the dollar rising much less than average prices (officials only 1.2% this month) and rates are all but frozen, the talk continues at full speed.. But it’s not just the meat. Clothing and building materials have increased by more than 70% in the past 12 months.

Neither the Minister of the Economy nor Alberto Fernandez they consider (at least publicly) that the monetary question resulting from the budget deficit is directly linked to the inflationary phenomenon. The president even weighed the red of public accounts as a response to the pandemic, as has happened in almost every country. Obviously These economies have access to market financing to cope with the crisis and, in most cases, these are transitional deficits. Argentina reached the pandemic in recession and in the middle had to go through negotiation to get out of default.

Despite the fact that the Centrale has pressed on the dollar and that rates are still almost frozen, inflation still remains above 3.5% per month. As the elections approach, the exit from this artificial scheme will begin to be ruled out. The rise of “counted with liqui” partly reflects this vision.

Attempts to cover inflation under the rug are doomed to failure. The consequences of the budget deficit appear quickly. The Central Bank turned over $ 50,000 million to the Treasury to cover the pothole on May 21 and is already racking up a $ 240,000 million issuance in 2021. The figure will increase sharply in the coming months: more and more pesos will be issued than anyone else wants, which is fueling the inflationary phenomenon. Still, the year’s issue is much more subdued than that of 2020, amidst the big state aid before the economy closed. According to a report by the brokerage firm “1816”, the financial aid from the Central Bank to the Treasury accumulates 0.6% of GDP over the year, against nearly 4% in 2020.

Rates, prices, wages

The natural response would be to increase the interest rate to encourage investment in local currency and curb dollarization. But the government is resisting, as it would exacerbate the economic downturn, to make matters worse amid new restrictions in the face of the wave of COVID-19 infections.

The remarks on the prices and the rise in food have already exceeded all forecasts and the seals signed two months or even months ago are already old.. The vast majority of unions have signed comfortable dues increases of 29% to 35% per year. But in all cases, there are review clauses. Bankers, for example, were the first to sign their agreement with a 29% increase, but in the second half of September they will sit down to take stock of the development of wages in relation to inflation.

The government itself will support the unions’ demands for the reopening of joint associations. 2021 will be another year in which wages will once again lose in the face of inflation. But it would be politically suicidal to reach the November elections with a fall in purchasing power of 10 additional points. There will also be recompositions for the millions of people who charge social plans. Not just legislated quarterly adjustments, but new one-off bonuses like the $ 15,000 awarded last month.

May ended as a record month for the Central Bank, which bought more than $ 2 billion. But it is no less paradoxical than the same month, the financial dollar rose 6%, emerging from the drowsiness of recent months. The “cash settlement” returned to levels of $ 165 and the free dollar rose the three days of the last short week to $ 157.

Another much deeper phenomenon is now added to the usual imbalances in Argentina’s economy. It is about the strong geopolitical change in Argentina, which is moving away from the Western world to align with Russia, China, Cuba and Venezuela.

The dollar got spicy with the election several months away. A bad sign, as the period of financial and exchange rate turmoil is well advanced. This currency jump suggests that the head of the BCRA, Miguel Pesce, will have to intervene again with the sale of dollarized bonds so that the “cash to liquid” no longer escapes. It’s not free, because at the end of the day you end up losing bookings, which you have a hard time accumulating.

The government can afford the “luxury” of coming to elections with an annual inflation rate of over 50%, but it would already be much more complicated to vote amid a new lack of exchange rate controls. For this reason, all the “artillery” will be used to prevent the gap of exchange between the official and the free from widening, as has happened in recent days.

The dollar got spicy with the election several months away. A bad sign, as the period of financial and exchange rate turmoil is well advanced.

The high level of government mistrust among investors will cause Argentina to miss another great opportunity. Virtually nothing will be left of the high commodity prices in Argentina. By the end of 2021, it is estimated that the Central Bank, with all its fury, will accumulate reserves of only $ 1,500 and $ 2,000 million. All this despite the additional $ 8,000 million that soybeans will leave and the $ 4,300 million that the Monetary Fund will transfer as part of the capitalization it provides for all member countries.

Inflation, parity rates or the overheating of the dollar, however, appear to be anecdotal problems alongside the signals that the government has chosen to give on geopolitical questions. Argentina is on a fast track to be more and more isolated from the Western world and there is no longer even the intention to hide it.

This week, no less than three strong signals: the decision to withdraw from the UN trial for human rights violations in Venezuela, the decision to support, with Russia, China and several African countries, an investigation against Israel for The “war crimes” in the bombing of Gaza were two obvious cases.

But to that the unusual trip of the Minister of Health was added to negotiate the arrival of the Cuban “sovereign” vaccine (still in the testing phase) in Argentina to fight against COVID-19. The vice president, Cristina Kirchner, has already firmly taken hold of Argentine foreign policy, in a 180-degree turn from the direction taken by the government of Mauricio Macri.

Today, Alberto Fernández will have to show how far he wants to pull the rope: will he accept that Argentina faces a new fault, this time with international organizations? With the Paris Club now comes a 60-day extension to determine what will happen to the $ 2.4 billion debt that is owed tomorrow. And an uphill battle is ahead with the IMF coinciding with the elections. Between September and December, more than $ 4 billion will need to be paid, which will need to be paid before a decision is made to delay a deal. A possible and unprecedented non-compliance with the Fund would imply a further severe blow to the little credibility Argentina has left investors.

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