The Government arrived at the October 26 elections with contradictory feelings. On the one hand, the relief of having arrived alive at the date marked on the calendar as an opportunity to plebiscite the economic program. But also, the tension of having achieved it with two bailouts in six months: that of the International Monetary Fund, in April and that of the United States Treasury in that same October. Both helping hands made up for the Achilles heel of the economic program: the inability to generate reserves. More precisely, in the 22 months of management, they were able to overcome the slope but it was not enough to once again have sufficient liquid reserves, not only to comply with the commitments made with the IMF itself, but also with “the market”, which asked them for a greater guarantee to provide sustainability and repayment capacity.
turning point. Since July, the fight to stabilize the exchange market has claimed several victims. The first was the level of activity, which had already been slowing down from the recovery shown from the basement of the first quarter of last year. To prevent the greater demand for dollars from unleashing distrust due to a resurgence of inflation, the interest rate rose to levels incompatible with the expansion of credit that had given so many benefits in the resurrection of the consumption of durable goods. For this reason, North American support was vital to obtain an endorsement without the need to “buy” that volume demanded by the negative expectations that were a burden to the program. The economist Ricardo Arriazuone of those that put this factor at the center of the scene, the previous week already warned that the market had discounted a result (negative for the Government) that political analysts did not agree with. Fernando Marengochief economist of BlackToro, Global Welf Asset Management, interprets that
Argentina already had a reputational problem, burdened with a historical record of debt restructurings with an inflationary problem, the history of the chronic fiscal deficit that had been reversed in a short time but all threatened by a Congress that was grinding the fiscal surplus caused the market to get rid of local assets and go out to seek exchange rate coverage. “Because there was no trust, we stopped consuming and investing and the pesos: what did I use it for?: to demand dollars”. This is how the vicious circle began: a drop in activity, a drop in employment and real wages, an improvement in external accounts due to a drop in imports, demonetization of the economy, pressure on the exchange market, with an exchange rate at the ceiling of the band and new inflationary pressures and real interest rates to counteract.
The break. With the “discount” already made, the somewhat surprising result unleashed a rally in the financial markets that quickly undid the downward path of the last month, at least. Since Monday the 27th, the S&P Merval index had accumulated a 43% rise in the first 72 hours. On Wednesday the 29th there was another litmus test: the first post-electoral Treasury tender was carried out, which showed a drop in the funding rate of the Ministry of Economy. $11.37 billion were due and financing was taken for “only” $6.8 billion (60% of the total), thus releasing $4.5 billion to the market. This marked a lowering of the rate (with an annual nominal average of 37.6%), a “roll over” of the debt that did not validate higher rates and greater liquidity that coincided with the Central Bank’s stated purpose of acquiring the committed reserves. Perhaps this supported the dollar, which did not continue to fall more than the first impulse in the opening of the markets.
The other indicators that will be monitored more closely are those that make up the triangle of activity level, real salary and employment. The wage index grew 1.26% in the month of August in real terms, but, as economist Alfredo Romano points out, it is a measurement that is contaminated by the income of those not registered, which has a considerable lag. Even so, for the registered segment, they grew 0.54% real monthly in August with dissimilar variations: private: +0.36% and public: +0.9%.
Also weighing on this change in expectations is the great threat that the program has had since March: the evolution of the demand for money. The economist Santiago Bulatfrom the consultancy Invecq and Chief Economist IDEApoints out that according to the latest presentation of the Central Bank, the demand for money is very depressed, “but if it recovers with activity, that would open the possibility of the BCRA buying reserves again by issuing pesos without the need to sterilize the pesos”. That is, a change of sign that implies the opportunity to turn a vicious circle into a virtuous one very soon.
Future projection. The economist Sergio Rodríguez Glowinskidirector of Ingeco Argentinahighlights that the Casa Rosada now has room to advance what the ruling party describes as “second generation reforms”: labor modernization, tax simplification, sectoral deregulation and a deeper process of openness and competition in the economy. ““They are less visible measures than fiscal adjustment, but more decisive in promoting investment and productivity,” he adds. But in his opinion, the central question is no longer whether the economic program continues, but rather whether the Government will be able to improve daily life without sacrificing the macro order that it managed to build. “Argentina is familiar with stabilizations that seemed solid and were dismantled when politics fractured or social patience ran out and this time, the Government’s bet is that the combination of conviction, speed and a broader political window will allow stability to be transformed into growth before wear and tear sets in again,” he concludes.
The change of scenario, more due to the context than due to the elements available at the time of the elections, can help a rapid recovery, but the lesson learned is that the clean and jerk is not sustainable without the correction of underlying situations. “From now on, I believe that the management of the Executive Branch and the negotiation with the opposition closest to the vision of a need to make structural reforms and thus lower Argentine costs will be key.”Marengo projects. But in the short term, it aims to drastically lower the cost of working capital and begin to lower the situation of reserve requirements, which were urgently raised when the green tide was sweeping away everything. At the end of the day, the trust factor must be translated concretely into an increase in the demand for pesos and thus launch the virtuous circle of consumption, investment and production. Without that, there will be no billion-dollar support to resist nor an electoral future to support it.
