Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

The week of the strong

Indeed the ‘heavy metal’ that currently rocks Donald Trump’s world was very much the focus at the G20 and there you’d know more than me – these top dogs did not come to Buenos Aires to discuss Argentina but a more suitably global agenda. Trade issues were almost as central as in last December’s WTO summit.

Wednesday 28 March, 2018
Mauricio Macri.
Mauricio Macri. Foto:PABLO TEMES

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Not a week goes by without some question from New England economist Dr Hale but some weeks he is more stretched to find an issue than others. Yet not this time around. He writes:

“I think you can guess where I’ll be heading this week. With so many worldwide economic hotshots in town for the ministerial meeting of a G20, representing 85 percent of global output, three-quarters of world trade, two-thirds of its population, 80 percent of food production (from about 60 prcent of the arable land) etc. etc., also including International Monetary Fund (IMF) Managing Director Christine Lagarde and 17 Central Bank heads as well as the 22 finance ministers, there must be something you can tell me about that. Anything else going on?”

My reply:

“Starting with Lagarde, she did not seem to take too much interest in the drought because her main priority was to see the multiple cascades of water comprising the Iguazú Falls. With so many confrontations between Argentina and the IMF, she was not inclined to provoke any needless friction now and she duly hailed the first half of President Mauricio Macri’s term as ‘amazing.’ Indeed she went so far down that road that, far from expressing understanding for Macri’s gradualism like most outside observers, she claimed to see nothing gradual in the reforms so far (perhaps she was speaking primarily from a monetary standpoint?). Her IMF predecessors have often expressed concern about Argentine debt, especially when on the rise, but Lagarde takes a favourable view of both its quantity (around 35 percent of gross domestic product) and quality as mostly owed within the public sector with minimal foreign debt. For her the bottom line is the economy staying open, especially in these times.

“Indeed the ‘heavy metal’ that currently rocks Donald Trump’s world was very much the focus and there you’d know more than me – these top dogs did not come to Buenos Aires to discuss Argentina but a more suitably global agenda. Trade issues were almost as central as in last December’s World Trade Organisation (WTO) summit with the host’s chosen priorities of the future of labour, infrastructure and sustainable agriculture mostly second string. For that reason I have surprisingly little of local interest to report. The generally bullish prospects for world growth this year, with forecasts as high as four percent, also affects Argentina – on the whole good news, of course, although they will also relativise the official 2018 growth expectations of three percent or more (currently jeopardised by the drought) even if achieved.

“One interesting sidelight of the meeting concerns the Organisation for Economic Co-operation and Development (OECD), which Macri would keenly like to join and whose Secretary-General Angel Gurría was in town, along with all those finance ministers and central bankers. His comments fell short of Lagarde’s unstinting praise, thus suggesting that Argentina’s OECD membership should invite the same kind of caution as the famous European Union-Mercosur trade agreement. ‘Important and courageous reforms,’ yes, but an OECD report detects numerous aspects in which Argentina fails to measure up to the organisation’s criteria – low productivity, a below-average percentage of the population in the workforce, stagnant investment, infrastructural shortfalls, high poverty levels, regional disparities, sharply unequal income distribution, limited upward social mobility and declining education among others. There are, of course, all sorts of chicken-and-egg arguments as to whether countries should match up to these criteria before they can join or whether OECD membership helps them to reach the standards of developed countries.

“Last and perhaps least regarding this week’s global huddles, David Malpass, the United States undersecretary of the Treasury, lived up to his name (in Spanish at least) when at the parallel Institute of International Finance (IFF) conference he impudently urged the Macri administration to improve its fiscal performance at a time when Trump’s 2018 budget has just doubled the US fiscal deficit from three to six percent of GDP.

“OECD sceptisim notwithstanding, Macri could boast at least one major advance during the global meetings this week when the INDEC statistics bureau registered 7.2 percent unemployment in the last quarter of 2017, visibly down from 9.3 percent in mid-2016. For the first time in a long while job creation outstripped population growth and this should be hailed, even if there is widespread criticism of the quality of many of the 433,000 new jobs (the underemployed add another 10 percent to the jobless total). Nevertheless, a third of the workforce remains stubbornly in the underground economy and approximately four times as many people are below the poverty line as jobless, thus indicating that unemployment is not the only problem. Finally, the INDEC data shows that the OECD comments on a relatively small workforce are not misplaced because Argentina’s 31 main urban centres house 27.6 million people but only 12.8 million jobs.

“Finally, I owe you a correction from last week’s column. While I continue to think I was right to downplay from the start the overacted spat between the government and the industrial sector, I was wrong to question your assertion that recent Central Bank interventions might constitute a ‘dirty float’ – at least in the immediate term. In self-defence I might point out that I quantified Central Bank intervention as only a few hundred million US dollars because the column was written before the Friday when US$413 million were sold in a day to tame the greenback – by the start of last week these sales had already comfortably topped US$ one billion since the second weekend of March. The Central Bank thus seems definitely committed to holding down the dollar and hence inflation for now but for how long? My guess would be while the collective bargaining season lasts since the 15-percent wage increase is so central to this year’s economic plan. The Central Bank has plenty of firepower with over US$60 billion in reserves – the other side of the coin to trebling Lebacs from 400 billion pesos to US$1.2 trillion since reserves have grown almost US$40 billion in that period, a roughly equivalent sum and thus almost neutral.

“The upward pressures on the dollar continue (not least with some 87 billion pesos of liquidity released with the latest Lebac redemption) but this exchange market tussle has definitely curbed the carry trade bicycle for now – last month’s foreign speculative investment inflow was barely US$0.25 billion as against US$2 billion in September. That is because the previous attractive combo of high interest rates and a stagnant dollar has been replaced by static interest rates and a greenback on the move.”

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