For the last month much of the spotlight has fallen on an underachieving World Cup football squad (“messy” would be as apposite an adjective as any to describe their disarray) but now full attention should return to a faltering economy. Writes the New England economist Dr Hale:
“I could be spending a carefree summer on Martha’s Vineyard or somewhere but, masochist that I am, I’m immersed in the gloom of your winter and I do not like what I see. I was truly shocked by your June inflation figure of 3.7 percent, especially when I recall the long years in the past decade when we were almost praying for an annual two percent here in the United States and never really came close – even in the first full year of The Donald with his wild deficits, the US posted 2.1 percent for all 2017. What a way to celebrate return to emerging market status! But speaking of that, I was also filled with alarm for the future by a Bloomberg report on emerging market outlooks which was placed my way. This report concludes that the emerging market sell-off has yet to bottom out but what especially worried me is the fact that in the tables Argentina came at the bottom of the list for all classes of assets, whether bonds or stocks – despite (or perhaps rather because of) its 40-plus percent interest rates.”
My reply:
“This June figure is indeed a shock to the system, taking inflation for the first half of this year alone up to 16 percent (more than the ‘recalibrated’ target of 15 percent for all 2017). Not only is this by far the highest figure in the last 25 months but it cannot be explained away like most previous bumps in the road as the price of updating utility billing from its decade-long freeze – on the contrary, core inflation (excluding such one-off or seasonal factors) was much worse at 4.1 percent. According to the INDEC statistics bureau, the main culprits were transport (5.9 percent), food and beverages (5.4 percent) and health (4.3 percent) – just as well that only bus fares went up since the gas bills for a winter colder than average could be something fierce. The fact that the brunt of inflation is falling on such basic everyday items as food means that this crisis is not just distant thunder on globalised financial markets but coming home to every household.
“Inflation is expected to slacken off somewhat this month to under three percent since there will be less devaluation fallout with regulated prices static but July is always a tricky month for prices with winter holiday spending. If the momentum in the first half of the year is sustained into the second, it will challenge the 32 percent interannual cap in the recent agreement with the International Monetary Fund (IMF). The wage caps of current incomes policy are already being challenged with these price surges, with the re-opening of collective bargaining seemingly inevitable, thus opening the door to that familiar spiral of wage-push inflation.
“Anybody seeking explanations for this rampant inflation need look no further than the same day of the INDEC announcement for one key factor – last Tuesday the Central Bank renewed its Lebac bonds. These instruments serve to soak up excess peso liquidity but also multiply enormously the pressures to print money, adding a quasi-fiscal deficit of almost a trillion pesos to the red ink already flowing from public spending and the balance of trade. As a result the Mauricio Macri administration views the Lebacs as simultaneously a vital antidote against inflation and a time-bomb to be defused at all costs – the IMF would perhaps be inclined to see them as more the latter than the former.
“Yet the most immediate fear was a massive peso exodus from these bonds towards a dollar already surging 50 percent in the first half of the year and this did not happen last Tuesday. Despite these greenback attractions amid the ‘flight to quality’ across the world the Central Bank managed to renew three-quarters of the Lebacs at 46.5 percent – well above the benchmark 40 percent but just below the previous rate of 47 percent. Yet five out of every six investors renewing their Lebacs opted for the shortest possible term. But the clock is ticking for Lebacs, which are to be restricted to banks by mid-2019 under the IMF agreement, and the government will need to find new ways of taming dollar volatility, as well as bringing down interest rates which are a prime factor behind both halves of stagflation. Higher statutory reserve requirements counter much of the monetary expansion stemming from the Lebacs but also slow down the economy.
“This Ruby Tuesday (I call it thus because both inflation and Lebacs are telltale symptoms of a country in the red) was followed the next day by the opening of the Rural Society’s annual farm show in Palermo. Even if this event is more geared to livestock ranching than grain cultivation, it evokes the running battle over whether or not soy export duties will continue to be phased out in the light of fiscal urgencies. Incredible that there could be so many pressures within the Macri administration to retain this wholly irrational levy on the production of the most competitive sector, a levy which exists nowhere else in the world – could Argentina be right and the rest of the planet wrong? As the previous Cristina Fernández de Kirchner presidency amply demonstrated, export duties do not keep domestic prices down because production as a whole falls. But since this issue still remains unresolved, I won’t go too deeply into that for now.
“There will be winter holidays this week and next, which should mean less news in theory. But Argentina’s bimonetary economy continues to be heavily dollarised, as that June inflation figure reflects, which I strongly suspect of being the root cause of your fascination. The United States may have been absent from the World Cup but is all too present in the emerging market crisis with the Federal Reserve still boosting interest rates and Donald Trump threatening trade wars. How ironic that there should be this crisis at the time of our return to emerging market status but then, in the words of Groucho Marx, Argentina might not care to join a club which would have it as a member.”
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