The Argentine economy faced the PASO in a vulnerable state: a drop in the level of economic activity, constantly increasing inflation, negative international reserves and a high exchange rate gap.
The unexpected result of the primary elections aggravated the uncertainty and left an open scenario with possibilities for the 3 candidates.
Faced with this situation, the government immediately took measures that included a 22% adjustment in the “official” exchange rate, increasing it from $287 to $350; in addition to significantly raising the interest rate up to 118% in annual nominal terms (TNA) TEA=209.45%
However, the impact of these measures was temporary: although the BCRA resumed purchasing foreign currency, inflation shot up to double-digit figures. This was clearly seen in last month’s inflation, which was 12.4% according to INDEC.
Someone forgot to read the economics textbooks so as not to foresee that devaluing without the availability of dollars was going to translate into prices
Another effect of the devaluation after the PASO was the dollar gap. The difference between the price of the official dollar against the cash price with liqui and the “blue” remained above 100%, as was the case before the exchange rate movement.
According to the perspective of the International Monetary Fund (IMF), devaluation is considered a tool that can have various effects on the economy. On the one hand, it can increase income by boosting exports, while limiting imports and helping to reduce the exchange rate gap. Furthermore, it is argued that a decline in economic activity can act as a brake on inflation. However, these effects would be short-lived, given the current inflation rate.
In this context of higher inflation and high interest rates, both consumption and investment will experience sharp falls, deepening the recessionary cycle in which we find ourselves.
The current economic situation represents a structural challenge, rooted in its foundations, and no single measure could be sufficient to improve it, much less a devaluation. Rather, the history of exchange rate fluctuations in recent years should serve as a lesson, highlighting how variations in the value of the “official” dollar have a direct and comprehensive impact on the prices of the essential products that make up the basic basket. In other words, an isolated exchange rate correction does not solve any underlying problem, it only increases costs; In any stabilization program, devaluation should be only one of a set of measures to be applied.
However, looking to the future, a more encouraging outlook emerges. The recovery of exports in the agricultural sector and the positive impact of the new Gas Pipeline on the energy balance present a promising scenario. This could translate into an influx of foreign currency through foreign trade, an increase in tax revenue due to taxes on exports and an increase in economic activity in general. In a context of greater stability, it is feasible to project that these policies will be maintained in the long term, which could lead to a gradual improvement in the income levels of the population.
Author: Agustina CRUCEÑO, analyst at Focus Investment Management
FOCUS INVESTMENT MANAGEMENT
www.focusim.biz
[email protected]
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