My reply: “Don’t fret, Dr Hale, you’ll be having the occasion soon enough to ask the complex, clever questions which are more to your taste. The crystal-clear political mandate now won by President Mauricio Macri does not automatically translate into clear skies ahead for the economy and if it did, that might be a problem too – driving forward can be a lot simpler with no choice but to look at the inherited baggage in the rear mirror than when all options lie open.
“The current economic scenario is fraught with complications and paradox – sustained growth versus a wider trade gap, a shrinking primary fiscal deficit versus soaring debt service costs (a logical consequence of financing deficit with debt), inflation which is simultaneously being curbed by that lower deficit and fuelled by the energy subsidy cuts reducing the red ink, etc. etc.
“’Strike while the iron is hot’ might seem the message of last Sunday’s triumph urging Macri to press full speed ahead with his reforms, now that there are far less political toll-booths along the parliamentary road, but the various complexities are likely to slow momentum with the passage of time. Thus Macri was initially supposed to be meeting with provincial governors (the keys to tax reform) yesterday but this has now been rolled over by almost a fortnight. Instead various reforms will be proposed to a wide range of sectors on Monday but the content is likely to be as diffuse as the audience.
Furthermore, the Lower House caucus of Macri’s Let’s Change coalition will not be advancing from two to three digits overnight – Congress will be changing guard six weekends from now.
“The Argentine economy always rebounds in election years thanks to public works sprees but some of these rebounds last longer than others – this one looks more sustainable because growth is across virtually all sectors and not just construction and farming and because of the boost to investor and consumer confidence (for once a feel-good campaign seems to be accompanied by many people actually feeling better). This growth definitely has legs for next year and probably the year after that, especially with Brazil holding its end up – that factor in tandem with Peronist disarray should be more than enough to weigh the odds heavily in favour of Macri’s re-election.
“But I also see some serious problems ahead, of which I would like to highlight at least two – inflation and the trade gap. The failure to meet inflation targets can always be blamed on the utility bill hikes enforced by the need to correct relative prices and dismantle the subsidy mountain in order to bring down the fiscal deficit feeding inflation. Yet beyond the hikes core inflation remains stubbornly stuck at the monthly 1.5-percent level, which makes any singledigit annual inflation remote.
“Yet (and especially taking monetarist theory at face value) the main culprit for inflation might well be the Central Bank at the forefront of the fight against it. If money supply is expanding at an annual rate of around 30 percent (ahead of even interest rates), how on earth can single-digit inflation be within sight? This percentage might look relative when placed within the international context of recent years – under quantitative easing the world stock of dollars has quadrupled while other major currencies (euros, pounds sterling and yen) have doubled or trebled. But those days could be numbered and both the volume of debt issue needed to satisfy the publicsector borrowing requirement and the rapid expansion of credit in the private sector (mortgages etc.) could produce some nasty shocks if and when the tide of global liquidity changes.
“Monetarism reigns supreme here in the sense that everybody is interested in money and nobody in commerce – few enough economists pay any attention to the widening trade gap. Yet the growing economy, which Macri is likely to take into the 2019 presidential elections, will also include a doubled trade gap of almost US$7.5 billion (according to an average of forecasts). I was struck by last month’s trade figures with imports rising 20 times as fast as exports so far this year – export-led growth becomes an uphill battle when exports grow nine percent in volume but still fall five percent in value, as they did last month.
“Tax reforms are definitely on the frontburner and while Macri’s meeting with the governors was scheduled for yesterday, I thought we might even have to start discussing it immediately but since Macri has postponed it, we can do the same until there’s a clearer idea of where that is heading. It will be interesting to see how Macri proposes to square the circle between supply-side tax cuts and slashing the fiscal deficit. But I detect a definite intention to increase personal and reduce corporate taxation and thus counter the John Kenneth Galbraith syndrome of “poor businesses and rich businessmen,” as we have discussed previously, reversing the current division of direct taxation between 70 percent corporate and 30 percent private.
“So much for the big picture. There remain odds and ends such as the bizarre removal of Juan José Gómez Centurión as Customs chief just two days after the election when he had resisted last year’s onslaughts – can’t tell youright now exactly what is going on there but various things could be being swept under the red carpet unfolding at Macri’s feet.”
The irrepressible Dr Hale could not resist expanding his contribution beyond an obvious question to have the last word: “Thanks, Michael, for giving my not very interesting question a semiinteresting answer. Especially interesting what you have to say on future changes in international credit and from here in the USA I’d like to throw just one nameyour way – John Taylor. If and when The Donald plonks him at the head of the Fed, watch for interest rates to treble and once that happens, you can be sure I’ll be pinning my beady little eyes on Argentina.”