Economy & Business - February 2023

Economic woes follow Argentina’s World Cup bliss

For most Argentines the euphoria of winning the football World Cup title for the third time last year quickly gave way to renewed economic malaise. When the celebrations were over, a cut of asado, the quintessence of the Argentine barbeque, was 5.5% more expensive. The cost of beer rose 11%.

Those weren’t isolated price increases. After hitting a nine-month low in November last year, inflation again surged in December and ended the year at 94.8%, the worst in over three decades. January and February aren’t looking much better. The resurgence of inflation shows the limitations of price controls introduced by Economy Minister Sergio Massa on 11 November. Under the deal, supermarkets and suppliers had agreed to freeze prices for 1,700 products and limit increases on another 30,000 products for three months. 

A drought has helped push the cost of fruits and vegetables higher, but inflation has taken on its own dynamic and is anything but temporary. In fact, economists polled by the central bank project inflation accelerating slightly this year to 97.6%. That is bad news for the ruling coalition of President Alberto Fernández ahead of presidential elections due on 22 October. According to an opinion survey conducted by political scientist Raúl Aragón for the weekly Perfil, the biggest problem the country faces is not corruption, insecurity, or education but inflation.

Not surprisingly, the most competitive candidate from Fernández’s left-of-centre Frente de Todos (FdT) coalition – Massa himself – trails with around 26%-27%, according to a poll conducted by Federico González & Asociados. Possible candidates from the right-of-centre opposition alliance Juntos por el Cambio (JxC) are in the lead. Horacio Rodríguez Larreta, the incumbent head of government of the city of Buenos Aires, and former security minister Patricia Bullrich both have around 30% support.

Indicative of growing anti-establishment sentiment is the strong third-place showing by Javier Milei, a Donald Trump and Jair Bolsonaro supporter who considers himself an “anarcho-capitalist”. In a scenario of six hypothetical candidates, he came in a distant third place with around 18%. But in an open list of potential candidates, Milei came first, ahead of Vice President Cristina Fernández (who has said she won’t run) and with double the support of Larreta or Bullrich. So if Massa is to stand a chance, he will have to first tame inflation and that, by most estimates, is an uphill battle. Underlying Argentina’s runaway prices are broader, more chronic problems with Latin America’s third largest economy.

Massa has applied all his political cunning since he took office last August to see through an International Monetary Fund (IMF)-agreed austerity plan by implementing a hiring freeze of civil servants, cutting energy subsidies, and slashing the country’s budget deficit from 4% of GDP in 2021 to under 2.5% in 2022. Bond prices roughly doubled since October, albeit from an all-time low of only 19 cents to the dollar and remaining at what investors call distressed levels, with a high risk that the country might default on its debt.

Despite advances, the underlying dynamics are challenging. Government spending remains in deficit and the last time the government had a budget surplus was in 2010. Monetary policy is still expansionary as interest rates remain below the level of inflation. Both undermine confidence in the currency, and a weaker peso makes imported goods more expensive. 

Turning all of that around in a few months to score some political points seems like a tall order. Massa said he will bring monthly inflation down to under 4% by April but economists estimate inflation hovered around 5.5% in January and will stay at similar levels through the first half of the year. It is likely that Massa and his aides will continue with a series of haphazard measures to prevent inflation and the economy from unravelling entirely. Indeed, Massa’s toolkit is becoming increasingly elaborate and extravagant.

  • An elaborate tool kit

On 3 February Massa renewed the Precios Justos price-control deal with supermarkets and suppliers through June, pledging to monitor millions of prices online with the help of modern software, and regulating more products and services, including private tuition and schoolbooks. There are even incentives to accelerate cattle fattening to bring down the price of beef. Consumers are to receive a 10% discount at participating butchers if they pay with their debit card.

The man with ample political experience but no economic background has been equally unorthodox when he decided to buy back US$1bn of sovereign bonds maturing in 2029 and 2030 at 30 cents to the dollar. That essentially gives Argentina a 70% discount on the debt it buys back, providing hundreds of millions of dollars in savings. It also helps limit the depreciation of the peso on the unofficial market, which uses the exchange of peso-denominated bonds for dollar-denominated bonds.

But it’s also a risk because Argentina’s monetary reserves with a net US$6bn were already perilously low and the only way the government has avoided an official devaluation of its currency was through a complex system of multiple exchange rates that essentially amount to currency controls. They make it harder for some to get US dollars and provide incentives for others, such as soybean exporters, to sell them, all according to government-set priorities. Now the government may see a short-term gain but leaves the central bank more vulnerable with less firepower to stem the peso in the future. “The operation comes at the cost of scarce foreign currency that is pressuring the country’s external finances, while doing little to support the sovereign’s repayment capacity in 2024 and beyond,” analysts from Moody’s credit rating agency wrote on 24 January. Moody’s likened the buyback scheme to a “distressed exchange and hence a default under our definition.”

The move is particularly risky because farmers had already anticipated much of their exports due to a government incentive, and a drought now threatens to diminish future dollar revenues from grain exports. Exacerbated by electoral uncertainty, economic activity too is projected to slow to 0.5% this year from around 5% last year. Domestic investors have already baulked at rolling over peso-denominated debt out of concern the government won’t be able to honour its inflation-linked liabilities. Ever-shorter maturities and ever-higher costs could further raise the spectre of default.

There is some potential silver lining for the current administration. Recent rains could improve harvest projections, and falling energy prices could help ease inflationary pressure and alleviate the budget. But any improvement would help Argentina to muddle through or survive, not recover, by election day. Such an outlook is more likely to favour an opposition or anti-establishment candidate than one from the government. 

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