Of

santiago manukian

Economist. Analyst at Ecolatina

The program with the IMF, defended by the previous minister and ratified by the current minister, is far from being a comprehensive plan. the same pursues two main objectives: avoid a default and limit the accumulation of imbalances in 2022-23. These may seem modest, but they acquire significant relevance if we consider that the margins for implementing an expansionary economic policy are very narrow and the risk of further deepening the imbalances potentially outweighs the benefits.

The scheme rests heavily on three “legs”:

Yo) crawling pegto limit the delay in the exchange rate without incurring a decent jump of the official dollar (where the accumulation of reserves is essential).

ii) Positive net loan in pesosto cover the difference between a modest deficit adjustment and a faster reduction in monetary aid.

iii) Positive real interest rateto bolster the necessary fundraising and keep financial dollars at bay.

As can be seen, the program not only does not include reforms that address the structural imbalances that clog the Argentine economy, but also nor is it consistent with a rapid reduction in inflation (it seeks to correct the fiscal-monetary imbalance but implies an increase in tariffs and “indexation” of the exchange rate) nor a path of dismantling the restrictions on exchange rates (the pesos “trapped in stocks” are aimed at financing the deficit). However, it establishes some minimum central guidelines to progressively correct the imbalances, trying to avoid a disorderly crisis, given the low initial margins.

This modest program is the one that was hacked in June: doubts about the credit in pesos and the inability of the BCRA to accumulate reserves have damaged two of its three “legs”, severely affecting the sustainability of the crawlingpeg, with all costs (and the uncertainty) that it would entail validate a decent jump in the dollar when inflation is at 80% and expectations are unanchored. This shows a continuity between the two main measures taken before the resignation (the “Creole QE” and the restrictions on imports) and the first announcements by the minister.

In this sense, the minister not only “spoke to the markets”: by printing a “fiscal” prejudice and aiming at restoring financial calm, he hinted that avoiding the collapse of the program (debt crisis and / or devaluation) is also relevant to contain a more acute deterioration of the social situation. It is understandable the immediate adverse reaction of the sectors calling for a massive deployment of social policies, both for the social reality itself and to prevent the adjustment and necessity from applying to the current account. The financial / social / political balance will continue to be unstable, even after the change of minister.

A necessary condition for manage this conflict effectively It consists in achieving greater coordination of economic policy, something in which the minister seems to depart from his predecessor: the staging from her first press conference it reflected her authority as a coordinator among her peers, which was not conveyed by Guzmán.

Now, is there a “plan B”? Is it possible to rotate 180 ° from the current direction, applying an expansive bias?

Beyond the IMF, it is the reality itself that sets its limits: It seems difficult to think that in the absence of the program the main macroeconomic orientations at the end of 2021 (sliding exchange rate at one third of inflation, fiscal deficit financed by emissions, frozen tariffs, use of reserves to intervene in the gap) could have been supported in the 2022-23.

In fiscal matters, even when a larger deficit is allowed or a reduction in dependency on local market debt is desired, the financial program must be covered and no new sources appear on the horizon:

i) The increase in the tax burden requires legislative approval, beyond specific actions such as real estate revaluation or the perception of profits through the “tourist dollar”.

ii) The foreign debt market will remain closed.

iii) International financial organizations (IFOs) are already providing positive funding under the agreement with the IMF.

iv) Monetary assistance is limited, not only by the agreement, but also by the legal margins, which also depend on the legislative approval for its modification. And on the latter point, also “playing strap” (which allows indirect issuance as for recent purchases of securities) involves serious risks for the currency frontsince at the extreme if private rollover drops to 0, they would face deadlines in pesos for nearly 9% of GDP until the end of 2023 (not counting the BCRA remunerated liabilities), to which is added the primary deficit itself.

On the tariff level, beyond the fact that the savings produced by segmentation are limited, an aggravation of the delay collides with fiscal limits.

In terms of rates, because in addition to explicitly contradicting the agreement with the IMF, the interest rate channel is one of the main tools for appeasing financial dollars and attracting liquidity.

In foreign currency, why a significant dollar lag implies the same short circuit with the IMF and it also requires having a “cushion” of reserves (or a sharp jump in the terms of trade) that doesn’t appear on the horizon.

To these limits are added the relationship with the IMF: with maturities in each of the months until the end of 2023, the formal cancellation of the agreement – and of the related disbursements – would entail defaulting on the entity, not only exacerbating the “inheritance” but also affecting the contributions of the residual international financial body, which are added to the financial program and reserves.

this landscape helps to understand the rapid ratification of the course: To prevent the spiral of the crisis from leading to devaluation, it is essential, at least in the short term, to restore the fundamental pillars of the program. The most recent announcements and measures (fiscal adjustment, positive interest rate, disincentive to consumption abroad) can be framed in this scheme, perhaps more out of necessity than out of conviction.

Even if the measures come into effect (for example, the BCRA builds up reserves again, imports can be minimally restored and the rollover of private debt consistently exceeds 100%) and calm is restored, the less financial stress on the regime could be replaced by an intensification of the pressures of politics and social reality, even more so in the face of the election year. But the reality limits that have restricted economic policy to the current program will continue to be tangible. In this sense, the challenge transcends urgency, the financial / social / political balance will be unstable and the risks will remain latent.

What to Expect? A constant collision against these limits, which will force the “orthodox” measures to exaggerate in moments of financial stress and to relax them as much as possible in moments of greater calm, but always within the central guidelines that reality imposes: more or less “hard” negotiations with the IMF for the objectives, and specific impulses of partiality expansion that will develop within a limited range of action.This does not constitute an economic program per se, but rather states that there is no possibility of a plan B.