The year 2023 was marked by the continuing attempts to support economic activity through fiscal expansion. The government’s growing financial needs were covered by the unwanted issuance of pesos, which generated demand for foreign currency on the official foreign exchange market – causing a sharp decline in reserves – and on financial markets – causing an increase in the exchange rate gap. At the same time, the acquisition of any asset was a good alternative to cover the loss in value of the peso, exacerbating the demand for assets.
In his attempts to stabilize the economy, The new government has chosen to eliminate the imbalance in the peso market. The initial devaluation, combined with the increase in the PAIS tax and the adjustment of related prices, accelerated inflation, reducing the purchasing power of peso-denominated assets. At the same time, the strong fiscal adjustment, the excessive reallocation of public debt and the BOPREAL tender for the cancellation of import debt have dried up the peso market, resulting in the sharp narrowing of the gap and the record purchase of foreign currency by the BCRA. However, Just as there are no pesos to buy dollars, there are no pesos to demand goods, which explains the severe recession we are facing.S. In this way, to the 1.9% decline recorded by the EMAE between September and November 2023, a contraction of 3.9% is added in the following two months, a situation that will certainly last until March.
Although long-term growth depends on employment, capital endowment and total productivity of factors of production, In the short term it will depend on what happens with the impulses to aggregate demand.
When explaining the current recession, it is worth remembering that the global economic slowdown and the expectation of high interest rates in the United States (which puts downward pressure on commodity prices) generate an unfavorable international environment. Furthermore, the fiscal adjustment of the national public sector, extended to the provinces through the reduction of discretionary transfers and the cutting of public works, is clearly contractive. The nominal remonetization of the economy for transactional reasons has also resulted in the reduction of consumption. Finally, the growth of loans in financial institutions at a rate higher than that of loans also results in restrictive monetary and credit policy.
Given this scenario, the question would be: what makes us think the economy could recover this year.
First of all it should be mentioned agricultural and related sectors. Comparing the current anti-drought campaign with that of 2023, this sector will show extraordinary year-on-year growth rates in the second quarter. Secondly, to the extent that remonetization arises the lowest capital outflow, This no longer affects the consumption level.
Third, growth in bank lending, with a fiscally balanced government, generates a sharp increase in the lending capacity of financial entities. To the extent that the inflation rate slows – for which it is crucial to maintain both fiscal balance and the low rate of devaluation – the front debt burden will decrease, which the universe of individuals eligible to take credit will strongly increaseallowing for strong expansion.
Ultimately, the big question is what would happen to capital flows into the country. To the extent that the improvement in trust results in lower output (or even inflow) of capital, the recovery in the level of activity could take on more dynamism.
Although the economy may show higher levels of activity towards the end of the year compared to the same period last year, the big challenge will continue to be how to achieve a sustainable growth process. Only in this way is it possible to reverse the strong social degradation that has been recorded for decades.
Source: Clarin
