Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

VAR for the IMF?

The overwhelming dominance of consumer-led growth models over several decades needs to be modified with a sustained period of export-led growth in order to create a more balanced, productive and competitive economy.

Saturday 16 June, 2018
The economy is yet uncertain.
The economy is yet uncertain. Foto:JOAQUIN TEMES

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One occupational hazard of writing a weekend column in midweek due to work and print schedules is that it becomes a hostage to fortune with late news, even when updated to within 36 hours of circulation. Last week was a case in point with Thursday night’s announcement of the US$50-plusbillion agreement with the International Monetary Fund (IMF). The New England economist Dr Hale is clearly alive to this aspect because he writes:

“Hardly had I said in our email exchange last week that anything we might say was speculative ahead of a final agreement with the IMF when that agreement was announced just hours later. I was on the point of saying that we’d just have to start again from square one but a couple of things gave me pause. Firstly, I’m a stickler for formality and I quickly noted that it was a staff-level agreement so that whatever Treasury Minister Nicolás Dujovne and (former) Central Bank Governor Federico Sturzenegger might be announcing still awaits approval from the IMF’s board of directors next Wednesday – in that sense we’re in no danger of being overtaken by the news this week either. Secondly, there was some serious number-crunching at that press conference to announce the deal but the road map was less complete than it seemed – not only were such indicators as this year’s inflation and the exchange rate fudged but many of the objectives or target figures specified are in reality multiple choice questions with several ways to skin a cat, while new aspects of the deal are emerging all the time, even ahead of seeing the fine print. So as I see it, we’ll be talking in the future or conditional tense for a while yet.”

My reply:

“As you say, there are multiple economic options – thus the figure of lowering capital spending by 1.5 percent of gross domestic product in the budget (almost half the proposed savings) looks highly specific but covers a multitude of sins. Yet not only economic options but political variables too. While an IMF agreement as such does not need parliamentary approval, anything fiscal does – we thus need to look beyond next Wednesday’s IMF board meeting to endorsement in Congress.

“Traditionally, mere mention of the acronym IMF triggers knee-jerk reflexes in Argentina, but at this juncture I do not see the reaction of the Peronist opposition as being so automatic. They all want to win next year but many ways to skin a cat here too. Some dream of the new austerity leading to an economic crisis which sweeps away the Mauricio Macri administration in the ensuing backlash, so that Cristina Fernández de Kirchner can return to the presidency which she should never have left in the eyes of her devotees – such feelings are encouraged by the IMF agreement being preceded by the fall of Mariano Rajoy in Spain, which seems to open up a rather more civilised way of removing Macri than mob turbulence (after all, the new Spanish premier Pedro Sánchez does not have a very much higher percentage of deputies on his side than the Victory Front/Civic Union caucuses here). Other Peronists are convinced that the worst thing they could do would be to obstruct Macri’s new economic course because he thus not only ensures his own defeat but also saves them the dirty work of having to tidy up the fiscal accounts.

“But you are always more interested in the economic than the political side. The initial focus after the announcement was on the macro-economic indicators and the fiscal targets (and, of course, on how many billions the IMF would be coughing up and when) but the monetary angle is significant. At one level the agreement boosts Central Bank independence but it also tells Sturzenegger what to do – namely, the stock of Lebacs is to be reduced gradually until restricted to banks by mid-2019 on the grounds that the Central Bank is no longer to finance the Treasury. Dismantling this dangerous snowball but also an alternative to the greenback obviously intensifies pressure on the dollar (even when maintaining 40 percent interest rates) and the Central Bank seems to be admitting defeat in advance in the face of these pressures as well as global and regional trends (Brazil is now starting to feel the devaluation too), abandoning the efforts to hold its 25-peso Maginot Line by withdrawing the offer to sell US$5 billion at that price.

“The middle initial in the IMF acronym is no accident – there is an evident faith in monetary policy to stop inflation but it could be misplaced. Devaluation is already trickling into domestic prices while the steep utility bill increases (still lagging, according to Dujovne) needed to lower the fiscal deficit also fuel inflation, not to mention world oil prices – the announcements on Journalists’ Day as good as admitted to stagflation as the name of the game by the end of this year. Fudging 2018 inflation and devaluation might well be deliberate in the hope that the worst will be over by election year. As in 2016 Macri sees his ‘second half’ evaporating. The next two quarters will be tough – so much so that negative growth cannot be entirely ruled out instead of the minimal now generally forecast.

“But evidently the solution goes beyond monetary policy and the exchange rate to arrive at a country which no longer lives beyond its means. Toward that end the overwhelming dominance of consumer-led growth models over several decades needs to be modified with a sustained period of export-led growth in order to create a more balanced, productive and competitive economy. A higher savings rate to reduce the dependence on foreign investment and more value-added activities would serve that end but even more housing mortgages replacing short-term shopping would be positive.

“Today Argentina kicks off its World Cup campaign in Moscow as one of the top quartet of international football history, while last weekend Macri was shown respect at the G7 summit in Québec as the future G20 chair – an honour which might not save the ‘second half’ for him as it seems an increasingly thankless task with trade wars looming and Donald Trump apparently preferring the company of North Korea’s Kim Jongun to Western democratic leaders. Yet Argentina remains nominally a frontier market still some way off its aspiration to OECD (Organisation for Economic Co-operation and Development) membership – it must raise the bar.”

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