Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

Macron > Macri

One man’s loss is another man’s gain, as they say – devaluation has its beneficiaries as well as its casualties.

Saturday 14 July, 2018
The merge between Macri and Macron.
The merge between Macri and Macron. Foto:JOAQUIN TEMES

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Bastille Day today finds France the strong favourites for tomorrow’s World Cup final, instead of playing for third place this evening in Russia, but what are the echoes of this French Revolution anniversary elsewhere in the world? Unless today sees mobs storming prisons to free the Kirchnerite bagmen held there, they would be hard to detect in an Argentina where most of the turbulence is coming from the markets and which is still trying to find its way – Macri is not Macron.

The New England academic Dr Hale has also noted today’s anniversary, writing:

“It never fails to irritate me how the French are always claiming the credit for revolutionizing the globe with their Bastille Day coming up this weekend when the ‘shot heard round the world’ was fired more than 14 years previously about 14 miles northwest of Boston in my neck of the woods. But anyway the purpose of our correspondence is to discuss the 21st century, not the 18th – a century in which the revolutions are technological rather than political. Hard to find any topic which stands out this week with too many Independence Days around at this time of the year – ours last week and yours last Monday. Even the dollar has calmed down in recent days despite that blast from the past with aggressive litigation from the vulture funds (or ‘distressed asset funds,’ as they like to call themselves) returning to the headlines. Summer here makes it hard to imagine how it must be in Argentina in the middle of your winter, but how do you read the current mood?”

My reply:

“The first fortnight of the famous ‘second half’ has not been marked by such pure doom and gloom in the business climate as one might imagine, even if for the second nonelectoral year running the once high hopes for the latter months have sagged into the certainty of stagflation. In Argentina systematic scepticism runs so deep that it even extends to questioning the automatic pessimism of those expecting the worst. Economics has a fully justified reputation for being the ‘gloomy science’ since inaccurately predicting a slump is never going to disappoint people like raising false hopes of a pick-up which never arrives – this logic of playing it safe explains why economists forecast many more recessions than actually occur.

“One man’s loss is another man’s gain, as they say – devaluation has its beneficiaries as well as its casualties. More specifically, the secondary sector of the economy or industry gains ground at the expense of the tertiary or services – the primary sector or agriculture would benefit too if this year’s drought had not been so bad. The fact that the dollar is now worth around 50 percent more in pesos at the start of the third quarter than it was at the start of the second boosts export earnings while shrinking the real wages of the domestic market feeding services and protected manufacturers – export-led growth favoured over consumerled growth. This also has its geographical correlation – the services largely based in this metropolis and the import substitution of the Greater Buenos Aires industrial belt suffer while regional economies inland suddenly find themselves with a more comfortably competitive exchange rate. Since the media are also largely based in the metropolis, they tend to present this shift in a more negative light than it probably deserves. Not all sectors are doing as badly as the prevailing gloom would suggest.

“This shifting economic balance between the capital and the provinces also has its fiscal corollary. The fiscal deficit targets agreed with the International Monetary Fund (IMF) imply further savings of around 200 billion pesos, which will not be easy, especially with the exit of Juan José Aranguren from the Energy Ministry taking the edge off subsidy reduction in that area. The main thrust of national budget savings is currently to transfer the burden of maintaining or withdrawing these subsidies to the politically aligned governments of Buenos Aires City and province. This is a novelty because until now the haggling over federal revenue-sharing has basically been with the mostly Peronist inland governors – these are also being pressured to absorb more burdens on the basis of the improved situation of regional economies, paying for more public works with less transfers. All these negotiations will need to be reflected in the 2019 draft budget, which must be submitted to Congress by two months from tomorrow.

“Yet placing devaluation in perspective should not be taken to the other extreme of denying any damage. The auto industry has lurched in just a couple of months from its best year this decade (half a million car sales in the first half of 2018) to plunges of up to 30 percent in some sectors. A nascent mortgage market has been stopped in its tracks by the way devaluation has jacked up the cost of UVA credits with the labour-intensive construction industry (a prime factor in keeping unemployment in single digits) already slowing in anticipation and building permits down 20 percent in both April and May. International flights have fallen by four percent (this might not be bad news for the balance of payments). Consumer confidence has dropped from above 50 percent last year to below 40 percent now. Etc., etc.

“However, it could also be worse. Cannot say at this stage how this week will end but the week preceding Independence Day saw the dollar fall by over three percent. This was achieved by raising statutory reserve requirements and hence the demand for pesos – so much so that the market showed reluctance to trade Lebacs for dollar-linked LETES. Yet such Central Bank manoeuvres do not suffice to banish volatility and vulnerability in a world where the simmering trade war between the United States and China continues to breed uncertainty. The fact that the currency crisis of this year’s G20 chair has made virtually zero contribution to the turbulence in today’s world is a sad reflection on this country’s relevance.

“Whatever the uncertainties ahead, one potentially defining aspect of this past month will definitely be buried this weekend – namely, the World Cup, whose power to distract was probably overrated from the start but was completely overtaken by the course of events. Tomorrow’s final in Moscow may or may not have Macron (present at Tuesday’s semi-final in St. Petersburg), but it will not have Macri.”

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