It doesn’t matter if the rabbit is black or white as long as it saves time.

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Marina Dal Poggetto, Sebastian Menescaldi and Lucio Gubermann

Economists. EcoGo Consultant

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“The end of the story is not yet written: the political scenario will define the economic one and at the same time the economic scenario will define the political one. The numbers of the economy in 2023 and 2024 will depend on how this iteration is taking place, which will also be influenced by the international context and drought; luck is also evaluated”, indicates the introduction, or executive summary, of the latest work by Eco Go Consulting. The rabbits in the title obviously have to do with the ability of the Minister of Economy, Sergio Massa, to find mechanisms that allow for some order to deal with the political transition.

Here are some of the highlights from the work done a few days ago.

January is over and like all odd years this too coincides with the start of the election year and the seasonal drop in demand for pesos.

The words used by Together for Change in last week’s statement affirm this in government they are “lengthening the fuse at the cost of making the bomb bigger” In an economy where inflation is near triple digits, the exchange rate gap is around 100%, peso debt maturities are concentrated in April-July and relative price distortion tends to increase with wages and pensions destroyed .

Distortion that not only occurs between the prices of ridiculously expensive goods and ridiculously cheap regulated services, but the growing segmentation and cross-subsidisation in the latter is eventually destroying the price system. It breaks not only the pattern of signals behind it, but also the balance sheets of many companies, mainly exporters which, as a defensive mechanism, increase the black and/or triangulate the operation.

Borrowing the “long wick” allegory the question is whether the cornered weight bomb detonates first, detonates later, or does not detonate and it is possible to defuse it.

“Several months ago, when we started talking about the Transition risk implied by a broken peso bond market, we have put together a double-entry matrix for thinking about scenarios. In one of the axes we include the availability of dollars: the government gets or doesn’t get the dollars. In the other axes we include the scheme of political transition: there is or there is no cooperation in the transition (cooperates or does not cooperate; cooperation is read as the expectation of compliance with the contracts in pesos of a new administration).

Obviously, the optimal cooperation has been the one that started with the pending corrections framed in a stabilization programme, not the one that accumulates more and more distortions trying to kick the ball for the next administration. But caught in this trap, the tough wing of the opposition today finds itself with a complicated speech to enter the electoral campaign.

The promise of “chaos and sacrifice” contrasts with Sergio Massa’s promise of “order and hope”. Again, because Massa’s message is maintained over time the “rabbits” must keep running.

Currently manage scarcity through trade administration in the hands of the Ministry of Economy (through SIRA) it is in the words of Massa himself (interviewed by Horacio Verbitsky in Rocket to the Moon) “who explains why the price controls that have failed Roberto Feletti and Paula Español work for him”. But what seemed to “work” in November and December, when inflation fell to an average of 5% per month (80% annualized) compared to 7.4% in July (135% annualized), starts producing water in early 2023. January inflation, according to our retail price survey, was 5.9% (near 100% annualised).

four factors explain the price increase: a) The price agreements that worked at the end of the year are starting to crack. b) The spike in the wholesale price of meat between 20% and 30% since mid-January. c) Increases in regulated prices, more monthly indexed, even with low weightings in the index, have an impact. d) Marginal dollars started to warm up in mid-January.

Far from stalling, Massa acts; he invents a debt repurchase with reserves that must not bypass the IMF and intervene in the gap and tries to exploit the operation with a repo with the banks using the repurchased securities as collateral. On the other hand relaunch the fair price deal, actively seeking sources of dollars including rain dancing to moderate the costs of drought.

It is clear that in any case (more or less nominally) the program in 2024 should start correcting relative pricesand this includes a decent exchange rate jump in December 2023 and/or January 2024, a response on maintaining peso contracts and a definition on decommissioning shares.

If the schedule goes well, at best inflation could return below 2% per month in the last months of 2024 (25% annualised), but inflation in 2024 is unlikely to be below the 2023 level (even if the devaluation occurs in December 2023).

Private sector coverage patterns in 2023, vs. visualization of what may come in 2024, are what will define nominality in this fourth year repeats 100% of 2022 (November data in “reaching for the rabbits”) and/or jump again like 2022. 130/150%? (scenario where rabbits are not enough and where the spiral of the gap and inflation complicate the transition). In any case, with a neutral statistical drag, with the direct impact of the drought and indirectly through the contraction of imports in the face of the tightening of the dollar, the economy would drop between 2% and 3%.

In 2023, presidential elections and regime change have become embedded in the opposition’s lineup of proposals, mounted on a financial crackdown scheme that addresses a growing shortage of dollars due to drought and exacerbates the issuance of pesos to try to keep the wheel running. continues to make non-disruptive scenario construction difficult.

to emerge

*In other words, even with not too pessimistic assumptions of harvest and financing/use of own dollars, there is no margin for raising the foot of imports, much less if dollars are used to contain the gap.

*Without statistical carryover since 2022, with direct negative impact from drought and indirect negative impact from dollar shortage, all paths lead to a decline in activity level in 2023.

*The higher the share of fixed-rate debt on remunerated debt, the chances increase that the liquefaction will not require a reprofiling of the Treasury’s peso debt, but in between with banks’ balanced balance sheets, you mix assets, liabilities, and your net worth as well. Seeking hedging with instruments that hedge you against inflation, devaluation, and/or both such as the dual, can end up leading you to the wrong corner solution.

*The Treasury’s stock of peso debt amounts to nearly $19.9 trillion, of which 35% ($7 trillion is in the hands of the market, the rest is in the hands of intra-public organizations).

* Of the shares held by the Treasury, one third correspond to fixed rate instruments and two thirds to floating rate instruments. Of the total stock of dual bonds, only 20% is in market hands ($0.8 trillion out of $4.6 trillion).

* Breaking down debt in pesos per holder, $2.2 trillion is in the hands of banks (mainly fixed-rate LEDs), $1.2 trillion in the hands of FCIs (one-third of the funds), $1 trillion is in the hands of insurance companies and $2.5 trillion in the hands of the rest, which includes public banks without Banco Nación, which is initially considered intra-sector public debt.

*Maturity concentration of market debt pre-STEP is $5.5 trillion (includes corresponding indexation under our base case).

*Of this, the majority is concentrated in the April-July quarter $4.3 trillion.

Source: Clarin

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