There is no doubt what the new government’s first economic package entails a strong stagflationary shock. Even the President himself put it forward. What isn’t clear is When will the necessary conditions be created to launch a stabilization plan with the possibility of success?, which allows for a significant reduction in inflation. In the meantime, we will have double-digit monthly records for several more months; The question is: for how many more months?. The social mood and the chances of success of the economic plan largely depend on this.
The correction of the exchange rate and the ordering of the foreign exchange market pushed Monthly inflation in December at levels close to 30%, leaving a strong drag on January, on which it was mounted the liberation of key prices in the economy which were heavily regulated, like petrol and prepaid cards.
The adjustment of subsidies began with the increase in transport tariffs, to which will be added, starting from February, the adjustments in electricity, gas and water tariffs, necessary to begin to converge towards the financial balance that the government intends for this year. With all this it is practically impossible to think so Inflation in the first two months could fall below 50%. And if we add to this inflationary dynamic the increases in private schools in March, the registration for the first quarter of the year would close at least around 70%. But that’s assuming an official exchange rate that advances at a monthly rate of 2%. A difficult hypothesis to support.
With inflation averaging 25% and peso interest rates well below inflation, The official exchange rate cannot continue to advance at 2% per month for much longer. With the inflationary path described above, the real exchange rate would end the first quarter at levels similar to those in July 2023, when the IMF warned of the exchange rate lag and the need to devalue.
There are those who believe it between April and May inflation would begin to decline sharply. But thinking, for example, about annual inflation of between 200% and 300% in 2024, would require an average monthly recording of no more than 6.0% during the remainder of the yeargiven that a good part of the inflation in the first quarter has already been “played out”.
At Equilibra we believe it is very difficult for this to happen, for several reasons: 1) many of the price corrections in the first two months are partial, and they would have a “second round” adjustment. (for example, public service tariffs); 2) a majority of unions agreed to wage increases of between 10% and 15% for December, well below actual inflation, and They will seek to rebuild revenue through a rapid reopening of joint ventures; and 3) starting in the second half of January, demand for pesos declines due to seasonal factors which, combined with the peso’s largely negative interest rate in real terms, most likely push the exchange rate gap upwards.
That is to say, thinking of inflation at least in line with that of 2023 (it would be close to around 210%) would require an effective short-term stabilization plan. And for this, it is a necessary condition not only the adjustment of relative prices (mainly exchange rates and tariffs), but also have a good cushion of international reserves to be able to defend the parity of the exchange rate.
The latter, unless some miraculous loan arrives from abroad, will hardly be able to happen before the end of the liquidation of the large harvest, which begins in March and ends in the middle of the year. But for exporters to have incentives to liquidate their currencies, the exchange rate must be competitive. In short: sooner or later, there will be a new exchange rate adjustment. The question is whether this time this will happen gradually (an acceleration of the picket line) or whether there will be a “discrete jump” again.
There are enough reasons to think that another decent jump in the official dollar, with monthly inflation around 25%, could bring the economy to the brink of hyperinflation. On the other hand, if the Central Bank chose to accelerate the pace of the daily increase in the official exchange rate, it is very likely that the main nominal variables of the economy would end up converging and traveling towards levels around 20% monthly. It wouldn’t be strange if, for example, salaries began to be adjusted based on past inflation and joint ventures began to reopen on a bimonthly or monthly basis.
Being optimistic, we can think that the government would be able to launch a stabilization plan only towards spring. Until then, inflation would not return to single digits and, instead, it would be closer to 20% than 10%. With this, and even assuming that the stabilization plan manages to sharply reduce inflation in the last quarter to 5% levels, Annual inflation would be at least double that of last year, and real incomes would fall again. The glass half full is what this scenario would pave the way for be able to resume a path of sustainable growth in 2025. The glass half empty is that it is unclear whether the company has enough patience to postpone its requests for many more months.
Source: Clarin
