What can happen to the economy until the elections: four possible scenarios

The dramatic drop in pesos bonds on June 8, the departure of Martín Guzmán on July 2, the blue dollar that broke the $ 300 barrier this Thursday are all milestones of a increasingly unstable economic prospects.

The proximity to the elections and the drop in the indicators of confidence in government are “restrictions” which hinder the possibility of stabilization and definitive recovery of the economy “, believe in IERAL, the institute of the Mediterranean Foundation. However, they argue, this does not mean that the economy will necessarily be totally destabilized until October 2023.

That’s why they arm themselves four scenarioscombining the short (until the election) and the medium term (after the election) and the optimistic or pessimistic perspective on what can happen and what has happened in Argentina’s recent past.

Scenario I: the economy gets out of control but then recovers

According to IERAL’s work, this it happened twice in Argentina in the last 50 years: 1988-1994 Y 1999-2007. Although both the lack of control of the economy and its subsequent recovery are due to very different causes, economic policies and external scenarios in the two periods, some conclusions can be drawn.

Investment is what contracts the most during the escape period (crash plan) e export is the only element that manages to expand. In the recovery phase, sales in the rest of the world continue to expand and are accompanied by good import and investment dynamics.

The activity of the the construction is the hardest hit during the period of lack of control while transport and communications represent one of the activities that expands the most in the recovery.

In macroeconomic terms:

• Inflation accelerates very strongly in the crisis and falls during the recovery.

• Per capita GDP suffers contractions between 10% and nearly 20% during crises. Then, between 4 and 5 years later, the recovery ends up exceeding pre-crisis levels.

• Purchasing power of wages it contracts by almost 20% during the flight phase and then recovers. However, not in all cases the pre-crisis levels are reached and / or exceeded.

• loans: very similar to the evolution of the purchasing power of wages.

• exchange rate During the out-of-control phase, the nominal value exceeds inflation, generating an increase in the real exchange rate and vice versa in the recovery phase.

Scenario II: the economy is out of control in the short term and does not recover after the elections

In this scenario, the economy actually ends up being totally destabilized.

It happened in Argentina between 1974 and 1990. Although in the midst of this long period there was some upswing (the Martínez de Hoz tablita in the early 1980s or the Austral Plan in the mid 1980s), they did not last long and the economy was subject to strong short-term imbalances. and with a stagnation in the medium term, affirms the work of IERAL.

Total GDP during these 16 years has hardly changed point to point

In this situation of stagnation, investment is the one that contracts the most and exports are the only thing that grows, construction falls sharply, while agriculture, transport and communications and private services succeed. to have some expansion.

• GDP: Stagnation in activity generates a negative trend in GDP per capita.

• Inflation: in a first phase it remains at a high but stable level. So it accelerates strongly during periods of uncontrollability.

• The purchasing power of salaries it contracts during crisis phases and then recovers, albeit partially. However, as there are only transient and very short recoveries, the trend is negative.

• Loans: They show fluctuations, but with a tendency to stagnate.

• The real exchange rate it is very volatile.

Scenario III: the economy does not lose control in the short term, but it does not recover in the medium term either

This context is what Argentina experienced in last 10 years where your economy he hasn’t finished losing control totally but he did not recover as production (GDP) remained stagnant.

In this situation of stagnation but without reaching the total lack of control of the economy, exports represent the item that contracted the most, overall consumption (public and private) and imports managed to expand, albeit to a very limited extent.

Industry and trade are falling and agriculture and services are showing positive growth in a stagnant environment.

• Pro-capite GDP: there is a downward trend

• Inflation: It is climbing steps with a clearly upward trend.

• Purchasing power of wages: it is reduced almost permanently for the whole period.

• loans: They remain stable at first but then enter a deep downtrend.

• Real exchange rate: stable in the first few years, but then shows a growing widening of the exchange rate gap.

Scenario IV: the economy does not lose control in the short term and recovers after the elections

The peculiarity of this scenario is that, however is the best of the fourunlike the previous ones, This has never happened in the past 50 years. However, this case combines the best of scenario III in the short term (without a crisis of total lack of control) and scenario I in the medium term (recovery).

From a speculative point of view, the total lack of control of the economy can help in the subsequent recovery phase since, on the one hand, the authorities in particular and the population in general, become more aware of the magnitude and consequences of imbalances of the economy increasing the willingness to make changes.

On the other hand, the same lack of control generates extremely low wages and asset prices which, in the face of a profound change in the economic regime that generates confidence, improves the reactivation process.

However, total loss of control of the economy is not a necessary condition for recovery.

What could happen

Scenarios II and III have in common the lack of economic recovery in the medium term and this is what happened between 1974 and 1990 and from 2012 to today.

“In these periods, imbalances in the economy were generally not attacked and, when attempted to reverse them, it was not done with sufficient depth as they returned shortly thereafter (Austral plan in the mid-1980s), “claims the work.

In this way, they say in IERAL, avoiding this type of scenario requires a real regime change which definitively restores not only fiscal imbalances, but also fiscal and currency policy, the lack of openness of the external sector, the problems of the labor market and pensions.

Furthermore, all these reforms they require political power and, therefore, “it is very difficult for them to occur with the current government, which has a very low level of trust and relatively little time to reverse it”.

Thus, “in the short term, the economy is divided between scenarios greater lack of control and precarious maintenance and weak from the current situation until the elections of 2023 “.

To find out what can happen four variables to follow. Two over which the government has no influence (evolution of inflation in the United States and the international price of raw materials) and two over which it has (political environment and agreement with the IMF)

Inflation in the US is accelerating, which translates into more pressure to raise rates that strengthen the dollar and weaken emerging currencies (with negative consequences for Argentina). Commodity prices are still high, but dollar strength is a threat.

The departure of Martín Guzmán, the intensity of the political struggles and the difficulties that the new Minister of Economy had to face to put his team together they did not help reduce the likelihood of the escape scenario.

For reduce the chances of losing controlin addition to hoping that the external context does not become too adverse, it is essential that Silvina Batakis present more details on how it will keep its promises control of spending and compliance with the commitments undertaken with the IMF. And that these measures have a strong support explicit view of the ruling coalition and the opposition, the report concludes.

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