Friday, October 15, 2021

OPINION AND ANALYSIS | 06-10-2018 10:50

Off and running before it can walk

Policy is more monetarist than ever when any claim to Central Bank independence has lost all credibility with last month’s abrupt exit of Luis Caputo.

Given that the economy is almost ceasing to be an issue in the United States (with such trending topics as the economics of college football for want of anything more substantial) and with no expertise to offer in such spheres as Supreme Court nominations, the New England economist Dr Hale turns with enormous relief to Argentina where the “dismal science” is more dominant than ever (not to mention gloomier). He writes:

“For the first time I can remember, the lead headline in every Argentine newspaper I have seen has been economic for the last seven days straight. I’m in heaven – even if most people down there would probably see it as hell. Messi might be the surname of your soccer superstar but I’d find it more appropriate for your economy minister with the situation he faces – messy. When the economy is so much on the top of the news, the only downside for me is that my questions become very obvious instead of abstruse. Thus I have to ask whither the 2019 budget with no working majority in Congress, now that the Peronists are saying it’s a whole new ball game after the IMF agreement and that the budget needs to be sent back to the shop. As for that agreement, the freeze on money supply expansion puzzles me. The impression given is that pesos are to be made an endangered species to accompany the lack of dollars and halt inflation but I see plenty of potential liquidity in both currencies – if Leliq interest rates are often topping 70 percent at times (incompatible with market stability), this sounds to me like a whole bunch of pesos at some stage while at the other end there are billions of IMF dollars in the pipeline, even if promising harvest forecasts do not materialise. Apart from which, your last email said that you owed me a more complete rundown of the IMF agreement.”

My reply:

“Indeed at the time of last week’s contact the news of the International Monetary Fund agreement was too fresh to permit more than a few minimalist lines boiling it down to US$7.1 billion more credit and accelerated delivery in return for new policies against currency volatility and inflation in the form of a sliding float (the 34-44-peso range for the exchange rate rising three percent monthly for the rest of the year) and zero expansion of the money supply until mid-2019.

“What needs to be added? Basically the agreement makes things easier on the external front and tougher on the internal by securing debt service for the rest of President Mauricio Macri’s term in exchange for some extremely recessive policies (for almost the first time in the Macri presidency the word ‘austerity’ may legitimately be used) – zero fiscal deficit and zero money supply expansion presumably add up to zero growth (although not necessarily zero inflation with six or seven percent expected for last month).

“Paradoxically enough, policy is more monetarist than ever when any claim to Central Bank independence has lost all credibility with last month’s abrupt exit of Luis Caputo from its helm. Not that there was any joy for his drive for more flexible currency market intervention in the final text – this is now limited to US$150 million daily (around half recent averages) and only if the 44-peso ceiling is topped.

“But your observations on the monetary situation being less rigid than it might appear are valid – how the Mauricio Macri administration moves from expanding money supply by an annual 30 percent or so for almost three years to freezing it altogether puzzles me too. If the ceiling is being tested now, it could just as easily be the floor later on if export dollars appear or IMF tranches are used while pesos are dried up. Always assuming the range stands firm – if the Macri administration ‘recalibrated’ before, it can ‘recalibrate’ again. For that reason enough for now although more could be said. Finally, picking holes in the agreement is easy enough but any criticism should be accompanied by an alternative.

“Just as well that the agreement drops inflation-targetting (the last vestige of Caputo’s predecessor Federico Sturzenegger) because the new monetary policy cannot halt inflation in any immediate term – neither the momentum from previous months with their devaluation only semi-absorbed nor the inflation to come from the correction of relative prices still lying ahead. This month kicked in with gas bills rising by up to 30-35 percent.

“Cannot help you much over the budget, which has been off the top of the news in recent days. A 2019 exchange rate of 40.10 pesos strained credibility from the start (although not beyond the powers of a monster recession) and now the IMF agreement has moved other goal-posts. The Peronist argument for a budget overhaul thus does not lack logic but provincial governors also had their reasons for giving their seal of approval to the original text – what is the point of securing a favourable revenue-sharing deal (including the reduction of their austerity sacrifices to a quarter of cuts) if there are no revenues to share?

“Speaking of revenues, these are running behind inflation according to last month’s figures – up by 32 percent with most le- vies much weaker since IVA value-added tax shot up 51.3 percent (which would imply that even recession cannot stop inflation, if indeed there is a recession at the level of consumer spending at least).

“But last month’s statistics also offered one gain from devaluation amid all the pain – the first trade surplus with Brazil in four years. Only US$6 million when this year’s trade deficit with the giant neighbour is expected to be US$4.5 billion (as against US$8.2 billion last year) but if not better dead than red, then at least better in the black than in the red.

“Now the subject has moved to Brazil, this weekend’s elections up there are at least as important a variable as the baby steps of the new monetary policy or anything else happening down here. Not that Brazil’s future will be defined this weekend or even in the seemingly inevitable run-off later this month. A showdown between two extremes looks equally inevitable but it will then remain to be seen how extreme they are – Jair Bolsonaro has potential to go down the Turkish Recep Tayyip Erdogan road of obnoxious politics and orthodox economics (not that Turkey has been much of a success story this year) while Fernando Haddad’s Workers’ Party (PT) was often pragmatic enough during its 13 years in power. But let’s just see what this weekend brings.”

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Michael Soltys

Michael Soltys

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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