Shortages of dollars and risk of inflation are the next challenges for a weak economy

Matías Kulfas and Martín Guzmán

The government was able to settle the debt maturities by 2024. It may not even have to bear the burden of vulture funds, as it could obtain a qualified majority for swap acceptance. But there is no truce. The positive result that Martín Guzmán achieved after many months of negotiations does not give space to celebrate, much less. The collapse of the economy is very serious and the challenges ahead seem very serious.

The government’s announcements this week reveal problems related to resource scarcity. To start construction via Procrear, credit lines totaling US $ 25 billion were announced. At the exchange rate with settlement, it is just over $ 200 million. It is barely enough for mini-credits for small household items (like painting a wall or changing furniture) and financing the construction of cheap houses on state lots.

The Government still needs to dedicate most of the money to help those who are facing the worst of the pandemic (via Emergency Family Income) or to pay salaries from the private sector (ATP 4). But to mobilize the economy, with state funding for housing or public works, resources are practically nil.

The resources that the State has to pour into the real economy are very scarce. With a high fiscal deficit, most resources continue to be allocated to social and labor emergency programs.

This year, the primary fiscal deficit (before debt is paid) will be one of the highest in history. It can reach 8% of GDP. But, paradoxically, Argentina is one of the countries that implemented the least expansive fiscal package in the world. In terms of GDP, it is not half dedicated by any European country or a third by the United States. It is also far from what happened in almost all of Latin America.

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Martín Guzmán with President Alberto Fernández (Télam)
Martín Guzmán with President Alberto Fernández (Télam)

It is clear that this relative austerity of the Government to face the effects of the pandemic with few resources still generates a disaster. The megaexpansion of weights is a latent danger and a challenge that must be faced with great care. Inflation is already giving warning signs. Although July ended at around 2%, after the second half of the year there was a strong acceleration that would leave a great resistance for August. There are increases in all items, both those that most react to the dollar’s rise and those that are less influenced by the exchange rate.

Whether inflation will finally be kept relatively under control will depend on what happens to the dollar. The famous “external restraint” comes on the scene once again. The Central Bank started selling $ 225 million in the first two days of August. Purchases of $ 200 by small savers continue to impact the level of reserves. And the worst months are ahead, because the strong inflow of foreign exchange due to the liquidation of the heavy harvest is over.

Between the demand for a “solidary” dollar, the payment of financial debts from the private sector and the payment with an expense card abroad, all the exchange that enters due to the trade surplus is lost.

The momentary “salvation” for BCRA is that the tourist movement is completely stopped. Amid a strict exchange rate, the Argentines would have taken the opportunity to travel abroad and also pay by card. The “tourism dollar” is at $ 100, while in the shadow market it is at $ 135. In other words, traveling abroad would be a real “bargain”, as it happens when currency gaps are opened.

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Facade of the Central Bank of Argentina (BCRA), in Buenos Aires (REUTERS / Ricardo Moraes)
Facade of the Central Bank of Argentina (BCRA), in Buenos Aires (REUTERS / Ricardo Moraes)

The scarcity of dollars is what most concerns today after the debt renegotiation. The Central Bank has nothing more than a monthly trade surplus of $ 1.5 billion. And if tourism opens up, the impact on travel reservations abroad can cause disaster

Will the government take this factor into account to rehabilitate commercial air transport? Tourism is Argentina’s great “chimney-free industry” and today it is in serious danger of disappearing. But it is no less real than a return to tourism would cost Argentina between $ 8,000 and $ 10,000 million that would come out of reserves. Foreigners entering Argentina, in most neighboring countries, do not exchange their coins in the formal market because they get half on the street.

In other words, You cannot keep the window open for the $ 200 per month purchase of the small saver and at the same time open the tour. If there is no drastic change in expectations, it is one or the other. A horrible choice, but within a foreign exchange market that has absolutely nothing left.

The BCRA chief, Miguel Pesce, continues with concern the scarcity of the foreign exchange market is evident. The debt settlement was not the solution, far from it. In any case, some corporations, such as Delphos Investment they warned that the increase in dollar “stock” and “cash settlement” were, in fact, influenced by some arbitrage opportunities between securities for the local debt swap. After that, these exchange rates are expected to calm down. In addition, it maintains that at $ 130 the real exchange rate is too high for Argentina’s historical average, unless there is a process of strong inflationary acceleration that “corrodes” this improvement in the real exchange rate.

Cecilia Todesca
Cecilia Todesca
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In an interview published over the weekend by the agency Telam, the deputy chief of staff, Cecilia Todesca Bocco, acknowledges its concern about the fate of the exchange rate: “Each jump generates an increase not only in products pegged to the dollar, but in many others. This is due to the distributive bidding between workers and employers ”.

The official announced that measures have been taken to think about the Argentine economy of the future. This will include a wage and price pact, tax reform and measures coordinated with governors to boost regional economies. The rates in pesos, moreover, must overcome inflation to discourage the purchase of dollars.

Price and wage agreement, tax reform, incentives to regional economies and positive real rates are some of the axes of the reactivation plan that is ahead. The statement was made by Deputy Chief of Staff, Cecilia Todesca Bocco

The official and the Minister for Productive Development, Matias Kulfas, will now have a leadership role. They are largely responsible for the plan or measures that know how to get the economy out of the hole. At least industry data for June showed a strong jump, much higher than expected, compared to May.

After the debt renegotiation, the future measures that the Government is outlining will be the key to consolidating the recovery of confidence. The bondholders’ agreement is clearly a step in that direction, but it is only the first step.

In the coming months, the Government of Alberto Fernández will have to clearly mark its course. Consolidating the tenuous reactivation that started with the opening of several sectors of the economy and avoiding a new exchange rate crisis will be the two great tests of fire ahead.

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