Inflation is not a novelty in the Argentine economy, but this time the current sequence has its distinctive feature: the anchors that were chosen to try to control what seemed to run amok periodically, were exhausted by the abuse of their use.
The people exchange rate for August, which was attempted to install as the “Massa effect” is achieving part of its mission: in August, The Consumer Confidence Index prepared by the Di Tella University rose 6.6% compared to the previous month. In the year-on-year comparison, said indicator shows a negative accumulated variation of 6.8%. Nevertheless. the levels at which it moves are still very low: 37 points, 40% lower than the peaks of 2015.
Numbers. Until July, the CPI had risen 46.2% in the first seven months of the year and private estimates project for August a 6.7% slightly lower than last month (7.4%), which would be in the order of 55 %, which annualized is around 95% per year.
Sebastian Menescaldichief economist of the consultancy EcoGo, believes that inflation in August will not exceed that of July. “The greatest impact of fuels will be in September due to the start date, it has yet to reach the values for July. The same is still high and without a specific cause“, Explain.
The other issue under consideration is that of rates, in a swarm of values and rate segments that is still difficult to understand and that “only serves to avoid loss and something similar is going to be the issue in wages,” underlines Menescaldi.
That’s why, Maria Castiglionidirector of C&T Economic Advisors maintains that the adjustment announcements (both rates and spending through the Administrative Decision (DA) 826/2022 regulations issued by the Executive Power this week) are insufficient to meet the goal of 2.5% primary deficit. “We estimate that this year the increases in gas, electricity and water rates would add 0.24% of GDP; DA savings would be 0.2% of GDP. They should advance more on the expense and that is why they are already trying to generate more income, such as the Profit advance advance, ”he adds.
the dynamics. The orders and counter-orders to update the rates, almost frozen for three years with accumulated inflation rates of 250%, led to a readjustment made up by the segmentation that further fragments the market, the big question arises in the future. What will be the adjustment mechanism in an economy that travels at a speed of 90% per year and with a growing projection for the 2023 election year? “Since the effort will be insufficient, the big question is how to finance the fiscal deficit, which will undoubtedly continue to impact inflation and, in turn, put pressure on the exchange rate.”, argues Castiglioni.
In his estimation, the official exchange rate would continue to depreciate more strongly, above 5% per month, but it will not be able to compose the current exchange delay. In the best of scenarios, he believes that it can be stabilized at the current level: something clearly insufficient to improve the level of reserves, at a minimum floor that gives no room for maneuver for any proactive policy attempt.
It is probable that, in this context, the tensions will continue, adding an additional risk seasoning: a greater increase in the exchange rate, or a greater deficit will end up accelerating the process, eroding the savings through the adjustment of tariffs.
Debt. The other weak flank in this race is the exchange rate. The choice as one of the “anchors” for the whole of last year set it back almost 30%: it increased 25% against 53% of inflation, but it was accentuated with the acceleration of the CPI this year, despite the fact that there was also a change of pace in the mini-devaluations.
The reluctance to make a devaluation jump that helps to inject dollars due to the increase in the trade balance is based on the fact that the dynamic could get out of control. But also in the debt profile with which the Government has financed itself in recent months.
In the last report of IERALits chief economist Jorge Vasconcelos recalls that, in the last twelve months, the stock of Treasury debt in pesos increased by the equivalent of US$31.6 billion at the official exchange rate. It became one of the most burning and complex issues to resolve in the medium term (December 2023). In fact, the recent bond swap managed to relieve debt maturities in pesos from August to December of this year by $2 trillion, but at the cost of moving maturities of US$15.5 billion to mid-2023.
“The interests of Leliq and passes are rapidly approaching a figure of $300,000 million per month, when the monetary base in August is around $4.3 trillion”, he adds. In his opinion, this implies that there is an “autonomous” expansion of the monetary base of the order of 7% per month just to pay said interest, with a growing perspective for next month.
It is precisely for these reasons that the “war against inflation” seems to be stagnant on the battlefield month after month. To pierce the floor of 6% per month between now and the end of the year, a stable demand for money will be required and not very pleasant news: some indication of the slowdown in the level of activity, something politically incorrect in the official nomenclature. For now, the increase in the interest rates of the Leliqs to avoid the flight to the “financial” dollar (from 80% to 97% the previous week) already officiates this type of “orthodox” remedy that is being noticed in the slowdown of economic recovery. The industrial production index prepared by FIEL shows a growth of 4.1% but in the first seven months of the year, the year-on-year comparison is already negative against the same period of the previous year.
Previous delays and doubts are taking their toll now, but further delays will fuel expectations of a wild adjustment, not by the government but by the market, as always, unappealable.
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