Argentina is going through the worst moment of the recession. This was predictable given the necessary recomposition of relative prices which, although underway, has not yet been completed. The president said this when he took office when he spoke of “stagflation”. The vast majority of economists estimate a decline in activity in the first months of the year. It’s one thing to say it and another to live it. The frustration of families at the loss of purchasing power and of traders and industrialists who do not sell is understandable.
Looking ahead and in the absence of very adverse political or climate scenarios, We should bottom out in the business in the second quarter. Just before April, but shouldn’t arrive later than June. The logic is that if inflation continues to fall and given the wage guidelines that are starting to be discussed, it is possible that some workers will start to recover at least part of what they lost in December and January. At the same time, the decline in inflation means the fall of a very regressive tax on citizens.
Now the discussion is what form the reactivation will take when it happens. Will it be in “V” format or will it draw a curve with a gentler slope? Nobody can be sure. Perhaps the more relevant question is what it depends on. Macroeconomics is the most relevant short term. There are three key questions. The first is the unification of the exchange rate which eliminates a large distortion and it solves one of the conditions that investors need to bring money to Argentina (it is a necessary, but not sufficient condition). The sooner this happens, the better, although it stands to reason that unification will entail costs, such as an increase in the exchange rate.
The second macroeconomic variable concerns the regime change that will lead to a substantial reduction in inflation. Will it be withdollarization, with the currency exchange, with the price agreement, with the currency indexed to Brazil 94? There are many possible combinations and they all have weaknesses and strengths. The third factor is that tax accounts are organized. The government has been vehement in this regard. But execution risk is always a variable to take into consideration. Even more so when fiscal adjustment reduces the president’s popularity. If these three things go well, investor and consumer confidence will play an important role, country risk will decrease and everything will flow better. It is important to note that since this was not a credit crisis, the exit may be quicker and the V is possible.
From a microeconomic point of view, structural and sectoral reforms are very important, but their impact is deferred, i.e. they have a minimal impact in 2024 and a very long-term one. Some will require legislation, others are within the reach of a decree and resolution. Labor issues, taxes, pensions, agriculture, aviation, healthcare, quality of public goods, paperwork and more. It would not be logical to expect all this to happen and everything to go well. But a good portion will generate productivity impacts that, while incipient this year, can also help multiply confidence and thus lead to a “V” outcome. The opposite is also true.
Will all this happen? Nobody can guarantee it. What we can say is that there will be problems in the macro and delays in the micro the recovery will probably be more limited. A 2.6% decline scenario (baseline scenario) is accompanied by a strong recovery that sets up a robust 2025. If things do not go well, we will live with a decline of more than 3% this year and start 2025 very strong down. Political and economic implementation, communication, climate and luck will be the condiments to see which dish we will eat.
Source: Clarin
