Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

Moving targets

Relaxing monetary policy will thus not necessarily accelerate inflation but it certainly will not slow it down either – the statement here seems to be that the best answer to the problems of gradualism is more gradualism.

Saturday 6 January, 2018
Minister Nicolás Dujovne.
Minister Nicolás Dujovne. Foto:Pablo Temes - CEDOC.

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If “new wine in old bottles” is a traditional English phrase, there is also such a thing as old problems in new years.

Writes Dr Hale: “If timing is of the essence, why do Argentine governments insist on such an eccentric choice of dates for important economic announcements if they want to be taken seriously?

Convertibility went into effect on the April Fool’s Day of 1991 and now Mauricio Macri’s economic team has chosen the local equivalent of April Fool’s Day (Inocentes, December 28) to ‘recalibrate’ its

inflation targets for the next few years. How much credibility should we give these targets? And does it mean that Macri is succumbing to those old Argentine delusions as to a little inflation being the price of growth and devaluation the key to being competitive? Anyway, that’s all I’ve noticed in the last fortnight, anything else I missed amid the festivities?

“Oh, and how very rude of me not to begin this missive by wishing you (and all our readers) a very happy New Year. In my last email just before Christmas I had anticipated plenty of snowclearing here in New England but the Arctic weather far exceeded my expectations – second-coldest Times Square in history at New Year, blizzards in Florida, -40 in some places, I’m talking Siberia.

Anyway I dropped out of touch but my New Year resolutions included a conditional commitment to continue tracking Argentina. I’ll take anything but boredom. I chose a good time to start following Argentina around the turn of the century when I could see trouble ahead for convertibility but in the previous period a modernising economy had seemed almost boringly stable with watchwords like privatisation and productivity.

Should Macri succeed in achieving sustainable growth and anything like Warren Harding’s ‘normalcy,’ I’m out of here. But I don’t see that happening any time soon.”

My reply:

“In my opinion the revised inflation targets are like the future bus fares – a closer approximation to reality but still falling short. Inflation-targetting in Argentina tends to be a Sisyphean task – no matter how high or low the targets are set, price-makers will always add a few points just in case (private 2018 inflation forecasts rose from 17 to 19 percent the same day). “Evidently the economic team had to do something to correct the mismatch between monetary and fiscal policy (and also incomes policy with wage ceilings set between  inflation forecasts and interest rates but much closer to the former). Tight money was patently failing to tame inflation not just because of its inability to address its other causes (relative price correction, momentum, cost push, etc.) but because it directly fuelled the flames by printing epic quantities of pesos to pay the high interest rates on Lebacs and to purchase the dollars to finance the fiscal deficit. A quasi-fiscal deficit highly influenced by the exchange rate  thus arose, moving up and down like a yo-yo in the last week as the dollar gyrated between almost 20 pesos and well under 19.

“Relaxing monetary policy will thus not necessarily accelerate inflation but it certainly will not slow it down either – the statement here seems to be that the best answer to the problems of gradualism is more gradualism. Less ambitious inflation targets should logically lead to lower interest rates but even this year’s revised target of 15 percent is undershooting last year’s independent forecasts averaging 16.6 percent (the basis for the wage ceiling guideline of 16 percent, as explained by Treasury Minister Nicolás Dujovne).

“Ultimately, the decision as to whether to prioritise more growth or less inflation is always going to be made according to political and electoral rather than economic criteria – Macri and his spin doctors have evidently decided that his re-election in 2019 is better served by two years of three percent or so growth than by the elusive goal of achieving single-digit inflation by that year. But there is also an economic logic whereby lower interest rates not only aid the productive sector directly but also make the economy more competitive via a more favourable exchange rate by revaluing the peso less (even the Central Bank balance gains since its main asset of reserves is in dollars while its main costs in the form of Lebac etc. payments are in pesos).

“But whether the relaxation of monetary policy will in fact free the dollar from last year’s stagnation very much remains to be seen. The 70-cent surge on the day of the announcement (doubling the greenback’s rise throughout 2017 in a single fortnight) was a predictable enough reaction to the underlying message that fighting inflation is no longer an absolute if it interferes with political strategy but it was not sustained into the new year. Furthermore, quite apart from government announcements, there are various seasonal factors at work at this time of the year such as Christmas bonuses and the start of the holiday season (especially with Argentines spending US$10 billion more abroad last year than tourists here).

“Nor should interest rates be seen as the crux of the matter – to hold them responsible for economic bottlenecks is to confuse cause and effect. Interest rates would never be so high if the fiscal deficit were not so high, imposing dollar purchases and Lebac issue to finance it and service debt which must be absorbed if inflation is not to be worse. This red ink is thus the root cause of all problems and while many see economic policy as an either/or proposition between spurring growth and taming inflation, seriously streamlining public spending in a year without electoral pressures will in many ways be the central challenge of 2018. A country admittedly living US$30 billion beyond its means according to this year’s public sector borrowing requirement. The spending cuts have yet to be defined but at least Central Bank remittances to the Treasury are to be scaled back (140 billion pesos this year, 70 billion next).

“There are other important points such as the 2017 revenue figures (five percentage points ahead of likely inflation) while some interesting aspects of a trade deficit heading close to US$9 billion emerged – that rather than a global pattern, Argentina maintains most of its deficit with its two main partners (almost that figure with Brazil and around half with China) while posting often substantial surpluses with most other countries and also that energy accounts for no less than 41 percent of the deficit. But perhaps best to save the rest for next time in case it proves to be a slow week in the silly season.”

(*) Michael Soltys, who first entered the Buenos Aires Herald in 1983, held various editorial posts at the newspaper from 1990 and was the lead writer of the publication’s editorials from 1987 until 2017.


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