“Argentina had a complex year in 2022, with important developments for inflation, monetary policy, trade, finance and fiscal policy”. From Alphacast, a platform that concentrates and processes economic and financial data, shows how the country has behaved through 10 graphs. It also provides some clues about what might happen in the next few years.
1) Inflation over the next 4 years: blood, sweat and tears
- 2022 Inflation = var. accumulate. Annualized CPI %
- Inflation 2022-2026 = average annual inflation implied by bond yields
- Average inflation = average year-on-year change in the 4-year CPI
After a 2022, with highest inflation in 30 years –December data was released on Thursday: the price index is expected to continue to do so high in the near future. Experts expect slightly higher price growth for 2023 and a lower, but still extraordinarily high, value for 2024. “A significant price slowdown is not expected, and historical comparisons show great upside risks,” explain the consultancy firm run by economist Luciano Cohan.
2) Interest on remunerated liabilities, one of the main drivers of the change in the monetary base
- Variation factors of M0 In % of the Monetary Base at the end of the previous year.
- Current year = Cumulative.
According to data released by Alphacast, monetary factors contributed to the aforementioned acceleration in price growth.with a significant increase in the monetary base by the end of 2022. In net terms, the Central Bank has increased the supply of money in circulationand its tight monetary policy was offset by interest payments on interest-bearing liabilities, dollar purchases, Treasury operations, and other factors.
A very different 2023 is not expected, as the imminence of the elections and various economic challenges make a disinflationary turn less likely.
3) The issuance of money for interest on remunerated liabilities was accelerated
- Endogenous creation of money through remunerated liabilities
- PR interest paid each month as a % of previous month’s PR stock.
- Current month = accumulated so far.
Following the graph above, the Central Bank’s remunerated liabilities have played a role important role in money supply growth in 2022. Due to both global tightening of monetary/financial conditions and rising inflation domestically and internationally, the official interest rate was to rise rapidly adapt to the new economic landscape. However, this also entails an increase in the interest accrued on the assets issued by the Central Bank and, therefore, an increase in monetary authority spendingwhich results in a net increase in the money supply.
4) Real interest rates have shown volatile trends in 2022
- Argentina: real ex-post rate
- Monthly and annual effective interest rate.
“In this sense, let’s take a closer look at the monetary policy rate,” warn from Alphacast. Both monthly and annual rates have been negative almost continuously since 2020 e the increase in inflation did not correspond to an increase in interest ratesresulting in a further negative net return on assets throughout 2022.
However, the recent slowdown in price growth, especially November’s surprisingly low print of 4.9% MoM, it gave lead to a more positive real ex post rate; however, nominal rates have not increased since October 2022, at the outset the real interest rate largely at the mercy of the price level.
5) Reserves have become volatile in 2022
- Accumulated change in international reserves
- In millions of USD.
The increase in commodity prices in 2022as a result of global geopolitical developments, it represented a golden opportunity for the accumulation of foreign currency; The impact of this factor can be seen in the significant increase in the net reserve position at its peak in March, when prices skyrocketed due to escalating tension between Russia and Ukraine.
“The results since then have been mixed, with large swings in reserve growth due to an overvalued exchange rate, a recovering economy, and rising international prices of imports”, they explain from the platform that processes the data. And they add: “In July, reserves grew significantly below the target, but in October and December they exceeded the expected level, with a net annual gain of 6.4 billion of dollars.
6) Currencies depreciate at a high rate, but below the inflation rate
- Argentina: Creeping peg of the exchange rate
- Wholesale exchange rate (A3500) Monthly average of the 5-day moving average of the devaluation rate
The wholesale exchange rate has been growing at an uneven pace throughout 2022, in line with the evolution of interest rates: the apparently sudden acceleration of inflation made it necessary to increase the amortization rate to avoid further overvaluations. Given that the exchange rate grew well below inflation in 2021 (for example, an annualized rate of 16.7% in December compared to an annualized inflation rate of 50.9% year over year), there is there was little room for weight assessment. The sudden tensions in foreign exchange markets in July and August, as well as the subsequent spike in inflation, precipitated a higher annualized depreciation rate in the last third of 2022.
7) The stock of inflation-linked bonds hits record highs
- Stock of inflation-linked debt (CER)
- As a % of GDP
Since 2020, the stock of inflation-linked CER bonds as a percentage of GDP has nearly tripledrising from 6.5% in January to 17.9% in November 2022. This marks investors’ desire to hedge against mounting price increases since inflation started to accelerate in late 2020. The growth of CER bonds poses major challenges to the authorities, who will have to do it equilibrium disinflation with the tax burden of bonds indexed in the past.
8) The inflation adjustment ratio was higher but erratic during 2022
- Argentina: BONCER forward rates
- IRR of inflation-linked bonds in % of IAMC
The IRR (implied rate of return) on inflation-linked bonds increased during 2022, rebounding sharply during the heightened macroeconomic uncertainty in July. Since then, levels have continued to rise, reflecting a more volatile and inflationary environment, but with considerable variability over the period. Forward rates have been low since Octoberafter more moderate inflation data and perhaps less news on the macroeconomic front.
9) Argentine bonds performed weakly, though not unusually
- ARG Bonds vs. others emerging
- Weighted global average, $EMB and $JNK.
Argentine bonds fell significantly in 2022, down about 17% during the year. This comes after two years of depreciation, with assets that were worth about a fifth less than they were three years ago.
However, this performance has not been unusually weak by emerging market standards, at least over the past year, as both the EMBI and JMK indices show equally lackluster results for undeveloped markets. Given the current global financial landscape, it is not surprising that markets are avoiding the increased risk of developing countries in favor of developed countries, which now offer high yields.
10) Subscriptions to the FCI are growing, but in a heterogeneous way by category
- FCP: subscription effect, from 3 January 2022 to 10 January 2023
- By category
FCI memberships grew significantly in 2022, although each fund category behaved differently. Money market funds were the year’s biggest winners. The evolution of investors’ appetite for risk will be a key driver of results in 2023.
NS
Source: Clarin
