The true Kirchnerist economic miracle would be to avoid hyperinflation
The presentation by the Minister of Economy, Martín Guzmán, on the status of negotiations with the International Monetary Fund (IMF) made on January 5, set off market alarms. Although it was suspected that the agreement with the body was far away, the exhibition and the subsequent discussion with the governors of the ruling party revealed that the distance between the parties is gigantic. Government bonds, which had already been punished, collapsed the next day.
The main discrepancy between the parties is, as we have been pointing out in this column, conceptual. The Government intends to reach the end of its mandate with the populist model of high fiscal spending and low interest rates intact, using stocks and controls to cover the imbalances that are generated. The IMF, on the other hand, seeks at least a partial normalization of the Argentine economy.
Guzmán said in his presentation that Three central goals are discussed with the IMF: the fiscal path, the reserve accumulation path, and the monetary financing of fiscal policy. He also argued that the discrepancies centered on the fiscal path. In reality, any student who has passed the Introduction to Macroeconomics course knows that if the fiscal path is not agreed, neither of the other two goals is agreed upon.
Making an analogy with the family economy, It is like saying that the amount of dollars and pesos that we will have in the account at the end of the month and the use of the credit card have been agreed, but we still do not know if we are going to spend 100,000 or 200,000 pesos in the supermarket. Continuing with the analogy, the IMF must be explaining to Guzmán that if he wants to spend 200,000 pesos in the supermarket, reserves will surely fall (because part of the products he consumes are either imported or have imported parts) and that someone will have to lend him the extra 100,000 to spend.
But, since no one wants to lend him pesos, he would have to go to the ticket printing machine. Here the analogy with families ends. The problem is that the Central Bank (BCRA) has already printed too many bills to finance the Government, a total equivalent to 7.5% of GDP in 2020 and 4.8% in 2021, generating the main challenge facing the Argentine economy today. : high inflation.
Government technicians have an important intellectual confusion regarding macroeconomics. But his confusion regarding microeconomics and wealth generation is even greater. More specifically, they cannot connect what happens in the micro with the macro results. Along with negotiating with the IMF, the government continues to implement an increasing number of Kafkaesque taxes and regulations that stifle the private sector. It is impossible for the economy to grow sustainably in this context.
“Government technicians have an important intellectual confusion regarding macroeconomics. But his confusion regarding microeconomics and wealth generation is even greater”
Among the many regulations, there is one that is becoming more acute and it is the difficulty for importers to access the foreign exchange market. The restrictions are not surprising. At the end of 2021, net international reserves were 2,996 million dollars, including gold. The nothing itself. The “including” is a temporary concept. Analysis of the central bank’s weekly balance sheet suggests that some of the gold could be being sold or at least pawned for loans in fresh dollars. Local progressives would faint if they knew that, if this operation were true (there is no official news), one of the most likely candidates to be on the other side of the counter is the investment bank Goldman Sachs, a specialist in this type of operation.
The truth is These restrictions are affecting local industry and commerce. This does not seem to worry the Government, which believed its own speech about the strong growth of the economy in 2021. It is true that the economy expanded vigorously last year, between 9.5% and 10%. A more careful analysis of the determinants of such exuberance would, however, call for more caution with a view to the future. There were three factors that boosted the economy in 2021 and they are unrepeatable: the end of the pandemic, the increase in the prices of our exports and the strong pre-election spending.
Comparison with other Latin American countries sheds more light on the past and the future. A growth close to 10% in 2021 puts Argentina in fourth place, after Chile, Peru and Colombia. The fall of 2020 was, however, the second in the region. In other words, putting 2020 and 2021 together, it is seen that the growth of 2021 was not as miraculous as the Nobel laureate in Economics Joseph Stiglitz argued in a column published in Project Syndicate on the 10th of this month.
“There were three factors that boosted the economy in 2021 and they are unrepeatable: the end of the pandemic, the increase in the prices of our exports and the strong pre-election spending”
The numbers of the region show an even more relevant warning signal for Argentina. One of the few countries in which GDP growth in 2021 was not much higher than forecast by the consensus of economists at the end of 2020 is Brazil. Two adverse shocks affected the neighboring country: a major drought and doubts about future fiscal sustainability. The same problems that plague Argentina today.
High temperatures and lack of rain may have a substantial impact on agricultural production this year, under the influence of La Niña. In the two previous episodes in which there were two consecutive campaigns under the La Niña weather phenomenon, 2007-2009 and 2010-2012, the combined production of corn and soybean fell between 17% and 29% in the second year.
At current prices, can imply a loss of exports of up to 8 billion dollars, almost a mirror of the profits of 2021. The Rosario Stock Exchange has already cut its corn harvest projections by 8 million tons (a drop of 5% compared to 2021), and argued that the soybean harvest will not exceed 40 million tons (a decrease of 7% against 2021).
It must be for this reason that the Government, so adept at thinking that negotiations with the IMF are just a geopolitical game, this time he only had the support of Stiglitz and not that of Pope Francis. They must be asking him to pray for rain.
That Stiglitz is unaware of the heat and drought is not surprising. A few days before his article was published, it snowed heavily in New York. But other parts of his spine are remarkable. Not so much because of what it says, but more because of what it left out. It does not mention, for example, the word inflation. The Indec reported last Thursday that inflation for 2021 was 50.9%, almost 15 percentage points more than that of 2020, despite the delay in the exchange rate and tariffs, and the freezing of multiple prices. This is the main dilemma facing the country, because inflation especially affects the poorest. In light of this, more than a miracle, the Government is an economic heresy.
The other thing that is striking about Stiglitz is that he leaves aside what he himself wrote in the past about the possibility of multiple equilibria and the role of the psychology of economic agents in the path of economics. The agreement, or not, with the IMF will play an important role in coordinating expectations. The absence of an agreement would be interpreted by Argentines as the choice of a Venezuelan economic model. Since we already saw that movie, we will know how to act in advance.
“There are parts of Stiglitz’s column that are remarkable; not so much because of what it says, but rather because of what it left out. It does not mention, for example, the word inflation”
The problem is that, as things are currently proposed by the Government, An agreement with the IMF would also not serve to coordinate expectations about a sustainable recovery. Guzmán argued that the fiscal path requested by the IMF “would highly likely stop the economic recovery.” In other words, if the IMF gives in and signs what the government wants, we will know that the IMF thinks that the agreement is weak in its fiscal and financing aspects. And if the government yields, we will know that a recession is coming.
The mystery will be revealed in the coming weeks. On March 22, 2800 million dollars expire with the IMF. In the previous days, Guzmán will experience firsthand another characteristic of the economy: the non-linearity of the macro variables. Faced with events as strong as a possible default with the IMF, everything accelerates. Faced with the abyss, we will see if the governors and non-Kirchnerist Peronism put on “the shirt of Argentina” and stop this nonsense.
Otherwise, the only miracle of this Government would be to avoid hyperinflation.