2023-07-24 08:30:00
The presidential candidates have so far presented limited proposals and without comprehensive plans to address inflation and exchange rate instability, which generates even more uncertainty just days before the PASO. Although the unification of the exchange rate, the elimination of the stocks and dollarization are on the table, its feasibility and impact worry economic experts.
In parallel, the Government seems to find itself in a blind alley: lowering inflation would imply taking measures with a high political cost and, in turn, the constant increase in prices it is significantly diminishing the chances of an electoral victory.
In this context, the palliative measure chosen by the Minister of Economy, Sergio Massa, was the renewal of price agreements.
In this regard, in a report capital foundation stated: “Although in the short term the reissue of price agreements will allow July’s record to be maintained around that of the previous month (6% monthly), going forward, these will only have short-term impact, as we saw in previous versions. With the latent monetary and exchange risk, the nominal value will return to the 8% monthly level. Thus, the year would conclude around 140%”.
Within this framework, the ruling party hopes to close the agreement with the International Monetary Fund (IMF) to avoid a devaluation and give fire power to the Central Bank to intervene in the exchange market.
However, the other pre-candidates are not presenting superior proposals to stop the inflationary escalation either.
“For now, (and it is even logical in the campaign because the adjustment measures are not very friendly to the votes) no candidate presented a comprehensive plan that allows us to think of a sustained drop in inflation. In general, there is quite a consensus that it is necessary control the deficit, not issue, order the relative prices, unify the exchange rate and order the reserves”affirmed the EcoGo economist Rocío Bisang.
In this line, are the proposals of the pre-candidates of Together for Change, Patricia Bullrich and Horacio Rodríguez Larreta.
However, Bisang considered: “The big question is whether this can be done and, in turn, sustain the part of the population that will be most affected by it. In this sense, a comprehensive plan is going to be necessary, and a lot of coordination and adaptability in the process”.
The near future and incentives
In the same sense, the economist Martin Kalos He affirmed: “Lowering inflation does not have a magic solution, which is somewhat what former President Mauricio Macri had proposed at the time. While he said that if the monetary issue is reduced, inflation is reduced. That was proven false and it was shown that in the short term there are many factors that can generate high inflation.”
“Inflation can be lowered and it must be done because it is not possible to live with these levels but also It has a cost and it depends who wins will try or not to offset the impact with direct transfer policies, income policies, etc,” he said.
For his part, he Fundar’s economic director, Guido Zack, opined: “Until now there was no pre-candidate with concrete proposals. Not necessarily because they do not have them, but because in the stabilization processes, and more so when the economy presents a regime of high inflation, the surprise factor influences and it is difficult to advance the measures without these generating incentives contrary to those expected”.
“To stabilize the economy it is necessary to have a comprehensive plan and attack all the fronts that affect inflation in Argentina today. That is, on the fiscal front we must move towards a consolidation process that makes the deficit financeable but that in turn does not limit economic growth. The space is narrow but you have to try to find that path”, indicated Zack.
“There are also monetary measures that must be taken: the real interest rate has to be positive to encourage savings in local currency and avoid the dollarization of the population’s savings,” he said.
“Also, there have to be exchange measures to order the current regime that clearly does not work,” he added.
The relationship between the dollar and inflation
In this sense, one cannot think about the inflationary phenomenon without considering its direct relationship with the exchange front.
“When the exchange rate increases, prices increase. The reason for this is that there are many goods (in economics they are called tradable goods) that some are imported, others are exported and therefore, the price is defined in dollars in international terms. That’s why, every time the value of the dollar in local currency increases, it is passed directly to prices”Zack explained.
In particular, “although Argentina has a single official exchange rate, the restrictions on the free movement of capital mean that there are many others,” he pointed out.
Business concern and paralysis in the campaign due to the lack of agreement with the IMF
“Given the shortage of foreign currency, the Central Bank began to restrict access to dollars to many sectors and importers and therefore, some goods are not imported. But others are bought abroad at parallel exchange rates and then these become relevant for the definition of prices”, said the specialist.
Following this line, the Chief Economist of the consulting firm Ecolatina, Santiago Manoukianstated: “In the midst of the uncertainties on the horizon posed by the electoral transition and the growing expectations of devaluation that induce the exchange rate delay, the high gap and the severe shortage of reserves, the gradual strengthening of the restrictions to access the official dollar has exacerbated the uncertainty about the future replacement costs of goods and inputs acquired abroad”.
“In this framework, companies perceive the risks of a potential correction of the official exchange rate, so it is reasonable that those who import -as well as those who use their own dollars or must repay a commercial loan- tend to adopt defensive positions, valuing their inputs/final goods at the best proxy they have for the exchange rate after this potential exchange rate jump: the parallel dollar,” he continued.
Consequently, “companies make the parallel exchange rate relevant in the price decision process and, on the other hand, the official exchange rate tends to be less representative”, he concluded.
Although the main candidates proposed structural measures to resolve the crisis, they did not specify how they will be carried out and the risks they entail.
bi-currency economy
In the first place, the pre-candidate Patricia Bullrich, proposed to establish a bi-monetary system.
“The bi-monetary system allows us both the national currency and the dollar, or other currencies, to be in common use for transactions and for contracts, We are very convinced of this plan”the former Minister of Security had pointed out months ago in dialogue with Radio Rivadavia.
While, Carlos Melconian, former president of Banco Nación and an economist close to Bullrich, stated: “It is necessary institutionalize bimonetarity. Argentina is already bi-monetary and we are going to go to a system of incentives so that a capital market in dollars flows again, which allows credit and local investment by large and small companies and investors.
About this proposal, Bisang said: “In a scenario without reserves, with a fiscal deficit and with a tense debt market in pesos, it is difficult to think that it could be a sustainable way out”.
Zack, for his part, affirmed that “the dilemma is, whether or not to allow the free circulation of the dollar, that it would generate risks. Promptly, what we experienced after convertibility: a currency mismatch”.
Uncertainty in the market: rising dollar while waiting for the closing of the agreement with the IMF
“Argentines in general have our income in local currency and therefore, if we allow banks to make loans in foreign currency again, the risk is that, in the face of a devaluation, people and companies will not be able to repay them and a banking crisis“, accurate.
“If the free circulation of the dollar is allowed, regulation has to be very strict and allow banks to lend only to those people who have income in dollars and not to those who have income in local currency to avoid these situations,” he said.
“This It greatly limits the attractiveness that banks can generate to attract deposits in dollars because they have limitations for their loans. However, it would make for a much stronger system,” Zack added.
Unification of the exchange rate and elimination of the stocks
Meanwhile, Rodríguez Larreta assured that will unify the 18 exchange rates in the first year of a possible management, although he did not give more details about it.
However, “An exchange unification is going to cause an inflationary flash and the problem is that today the Central Bank has very little firepower, that is, international reserves, and the risk is that the strong increase in the exchange rate will pass through prices with all its power”, explained Zack.
“And the increase in prices and the volatility and uncertainty associated with them can again generate a rise in the exchange rate. So, an inflationary spiral will be generated that without reservations is very difficult to stop and very harmful for the growth of the economy, for the distribution of income and therefore, for poverty”, he continued.
“Unifying the exchange rate without reserves or with negative net reserves is totally dangerous and undesirable. From Fundar, we propose a transitory process that would imply a effective exchange rate splitting or a unification compensated by fiscal means, that is, with withholdings and associated subsidies”, he assured.
“That would make it possible to accumulate reserves and pave the way towards a unification that obviously has to be the horizon. But the transition is risky and it is better to do it within the framework of a comprehensive plan and not abruptly and immediately in the current conditions of the economy. You have to prepare the ground, ”he explained.
On the other hand, Bullrich had assured: “We are convinced that the exchange rate must be withdrawn immediately.”
Moderating that statement, Luciano Laspinathe main economic adviser to the pre-candidate and national deputy for the province of Santa Fe, assured that the departure of the stocks will be “quickly, but not naively.”
Within the framework of the electoral dispute between the two pre-candidates, the head of the Buenos Aires government added fuel to the fire and said: “The stocks are not lifted the first day, how can they be lifted if you don’t have a dollar in the Central Bank.”
And he warned that with an abrupt departure from exchange controls, “the dollar will go to heaven, $5000, $6000, It is difficult to foresee it but there is not a dollar in the Central, it is a mathematical account, pesos divided by dollars”.
Within this framework, Bisang pointed out: “The exit from the stocks and the unification of the exchange rate are goals to be achieved if you want an orderly but timing and context are going to be important. Today we are not in the same situation as in 2015, the stock of pesos is much higher, there are no reserves to contain the exchange rate and a very quick exit from the stocks could end up generating an overshoot that would be, apart from recessive, dangerous in terms of inflation”.
“Disarming the stocks and unifying has to take place within the framework of a integral program, where the monetary policy goes hand in hand with the fiscal one so as not to generate more inconsistencies”, he considered.
dollarization
Regarding the dollarization proposed by the candidate for La Libertad Avanza, Javier Milei, Kalos assured: “It is a very bad idea pragmatically because it implies a very abrupt devaluation of the economy in order to dollarize the amount of pesos that exist today at a feasible exchange rate. This would be stratospherically higher than the current one.”
“In addition, conceptually and in the long term, it means losing an economic policy tool. There is the discourse that Argentina has misused monetary and exchange rate policy in recent years. But that It cannot be a justification to eliminate it because it is also very difficult to come back from dollarization and create a national currency again”.
“And tying yourself hand and foot not only to not having a monetary and exchange policy but to having that of another country that decides for you is a problem and it is believing that Argentine society is an idiot, that it cannot manage its own policies. Those who suggest that are even saying that they do not believe they are capable of it.” concluded.
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