Thursday, July 18, 2024

ECONOMY | 02-09-2022 12:00

Eduardo Levy Yeyati: ‘Devaluation is political kryptonite’

Economist, public policy specialist and dean of the Government School of Torcuato Di Tella University Eduardo Levy Yeyati on the challenges facing Sergio Massa and Argentina’s economy.

Eduardo Levy Yeyati analyses the immediate present of Argentina’s economic situation and the wider region as a whole, taking into consideration the possible options open to Economy Minister Sergio Massa. 

“His goal will be not to devalue [the peso] because devaluation in Argentina, for reasons which are worth studying in more detail, is political kryptonite,” he declares.

The Juntos por el Cambio economist, a specialist in public policy and the dean of the Government School of Torcuato Di Tella University, says there is no political support for much-needed austerity as he reflects on the indispensable cultural change for understanding that we Argentines have many privileges naturalised as rights.


How can Economy Minister Sergio Massa not devalue the peso?

That’s definitely included within his menu but his goal will be not to devalue because devaluation in Argentina, for reasons which are worth studying in more detail, is political kryptonite. So the politicians try by all means possible to hold back the exchange rate but above all not to devalue, or to do so discreetly, because it is seen as a sort of defeat. Thus although correcting the exchange rate makes sense and indeed it is running 20 to 25 percent behind or perhaps even more this year, it is difficult to do so voluntarily. 

One of his objectives will be austerity without devaluation. Will he be able to pull it off? I see that as being uphill but if he doesn’t, it will unfortunately be the task of the next government but at some point in time we are going to need austerity to make up for lost ground. So the question is rather the cost to the country which this government is willing to pay to reach the elections without devaluation.


And what would be that cost in concrete terms, less growth?

I think that all they can do they will do, starting with mortgaging the future. For example, if I need dollars, I can anticipate that by taking a very short-term loan because Argentina has a very high financial cost and is excluded from the financial markets. So I take a loan with leonine conditions over a very short time frame – i.e. until the next government. So what I can do is borrow against the future, asking companies to bring ahead revenues to absorb the impact, to improve the fiscal deficit, for example, but these are next year’s revenues. The following year they could do the same for 2024 but then that’s eating up the future a bit. I think that they will do that, I think they are doing that. 


As in 2015.

As in 2015, selling dollar futures, postponing payments. A frequent fiscal tack...


Putting the Treasury ahead of the economy.

Exactly, the spending is spent but the payment is left for the next government, as happened in 2016. All that series of tricks if you want short-term solutions, I think they’re going to try them until the last minute. It’s also true that the market increasingly rejects that because it is so short-term so the question is if it will be enough. It might be that at some point not even these tricks will be enough and then they will have to ‘yield’ to devaluation. But today what they are doing is trying to postpone that, accelerating the slippage of the official exchange rate a bit in order not to fall further behind the world market.


And regarding inflation, what expectations do you think are feasible?

I think that he [Massa] aspires to inflation falling below the levels of these weeks, which are close to 100 percent, flirting with three digits. I would calculate that if he can keep it below 100 percent, he could sell that as a success, given the circumstances and the expectations. The expectations and fears are for inflation to climb up a notch and become exponential because there is a limit where velocity generates vertigo, which in turn generates structurally different behaviour.


A geometric progression with acceleration accelerating the acceleration.

Yes and already today people have to think of what price to put on what is sold and how much to ask for work in wage negotiations. For now we are thinking in pesos but when things go crazy, when we lose reference as to what inflation is going to be, we start thinking in dollars or how we can cover ourselves. Then there is different conduct within a régime of high inflation, which we do not have at present. We do not have fortnightly updating of wages, no index-linked contracts – we do have some but very partially. We do not have the situation of the 1980s or the early 1990s before convertibility. But once we reach that situation, it is very difficult to come back. Indeed, thinking of how to lower inflation when you’re in a regime of high inflation is different from thinking how to lower it now. If you manage to avoid such slippage, even if there is more volatility, you could also think of that as a success, given the expectations of disarray and of how inflation is organised now. 

I see lowering it as more difficult because one of the things you have to do is adjust prices which previously served as anchors like public services and the exchange rate or at least not let them fall further. So it’s very difficult to think of inflation falling unless it isn’t properly measured or you incur the costs of explosive price lags.


By comparison with what would have happened without Massa, would inflation have been 120 to 130 percent?

That’s a good question – it’s difficult to make the comparison because it is always hypothetical. The problem in itself is not Massa nor [ex-economy minister Silvina] Batakis nor [ex-economy minister Martín] Guzmán but the understanding and conviction within the governing coalition. If you had installed Batakis and given her the political empowerment which she did not have nor was going to have given her technocratic nature, you would have had more or less the same results because what Massa is imposing, over and above the marginal and cosmetic aspects, is not very different from what was being proposed since the programme of the International Monetary Fund (IMF) began to be discussed.


In a previous interview we did, you said word for word: “What is lacking is a politician with the necessary leadership to take the economic measures to accommodate the structure,” or in other words, you were highlighting that one of the problems was political, not only economic. Could Massa contribute a political solution, not to make structural changes but the changes to permit [the government] to reach the end of next year?

I think he’s in better shape for political dialogue, for sitting down at the table to talk on equal terms with Alberto Fernández and Cristina Fernández [de Kirchner], asking them not to obstruct him. Because finally what is happening with this government, which has an extremely poor administrative level because it has done very little beyond what it has proposed and announced, is a problem of permanent obstruction, whether due to ideological questions or as part of coalition politics. So what Massa can do is to try and unblock that obstructionism. We see that in the area of energy, which was permanent obstructionism for Guzmán, and which now apparently is more under the control of the minister than of the energy secretary, who basically was previously not following the instructions of his boss, the economy minister. There are some signs that, at least politically, he has been unblocking that obstructionism. 

Now to that should be added a point against, which is that Massa is an ambitious politician with populist tendencies so that as soon as things start going well, he will use that in populist fashion to raise his own ratings. He’s not the kind of person to stand by austerity or die in the attempt to bring about order. Therefore, to some extent, what favours him on the one hand could restrict him in the future.


If Massa, in order to have electoral success, would not only have to devalue at a greater pace than is now being evaluated but would also have to lower inflation because that is the problem for the trade unions and most of the citizenry and if he has to increase public service billing to reduce the fiscal deficit, which will cause more inflation, he’s not going to be able to lower it. He would be successful if he held it steady but what would be a success for a technocrat would be a failure for a politician.

I would add more to that. If you had a horizon beyond next March or April, which is the political horizon today, you could aspire to inflation going up before it comes down, which is what I hope is what the next government aspires to with a more ambitious horizon. But what happens is that in this case he doesn’t have time.


You won’t reap the harvest, in the case of Massa.

He doesn’t have time to explain to people that what is happening now towards the second half of next year is the fruit of his efforts because the political decision-making belongs to the candidate, the measures...


... will be decided next autumn.

Very early, exactly. So in that sense it seems to me that those incipient successes will be of no use. Now let’s make one thing clear, success here is things not getting dramatically worse. So if you ask me as an economist, what success would be, it’s…


For you, yes, but for the hopes of the citizenry, success in political terms would be lowering inflation.

No, but I want to tell you that I think along the same lines. If you ask me as a citizen, I would say that success is permanent stability. That’s not going to happen with this government, which has neither the capacity nor the will nor the time. Now you asked me what would be a success for Massa, that would be expectations placing inflation at one level and his bringing it a little lower but that would not be a success in the sense of resolving the problem of inflation.


If the next government emerges from the opposition, what would it have to do, imagining that a success for Massa would be landing the plane at the end of next year with 80 percent inflation, without having devalued?

Yes, with much pending because he will possibly arrive with a deficit of 1 to 1.5 percent of gross domestic product, more than declared, with a lot of floating debt and overdue bills to be paid because I imagine that in an electoral year the public services ... don’t forget that adjusting public services does not imply adjusting them a posteriori to inflation, it implies just adjusting them and then leaving them quiet for a prolonged period.


Yes, inflation as such has public service pricing running behind three months later if there is no index-linking.

Exactly, it might sound like a tarifazo steep hike but it adjusts nothing. So you’re going to arrive with a far more complicated situation on various fronts than in 2016 and without reserves or access to any type of financing because they’re going to tap every last drop of multilateral financing. And today private-sector financing, both in pesos and dollars, is exhausted so that you have no possibility of financing gradualism. 

Now in that situation you basically have to do in the first six months and as quickly as possible everything that this government did not do and part of what the Cambiemos government didn’t do. For a start, you have to trim the fiscal deficit as much as possible, ideally with a balanced budget. Basically because you have no way of financing it, except with inflation, and precisely what you want is to lower inflation. Once that is done, which implies an inflationary impact because part of that will surely be updating public services, you have to have a monetary programme, which means saying what you are going to do with the dollar, what will be your range of inflation, what you’re going to do with interest rates ... and although you have a fiscal and monetary policy, that will not be enough because there is enormous inflationary momentum. 

Then you have to get together with some of those who set prices and reach some minimal agreement to lower inflationary expectations a bit, even if by consensus and for the first 12 months, and as an interim measure because the only thing that does is win time.


Would it be an Austral Plan with real austerity, something like Israel in the 1980s?

That wouldn’t be bad, yes, it would be an Austral Plan with austerity, exactly. Yes, and with incentives and this is important because we haven’t grown for the last 10 years or more. Incentives for the private sector to invest because what I have just told you is something to gain six months. 

In the interim you have to have pension reform to anchor fiscal expectations. Also the modernisation of labour norms (in order not to speak of labour reform) so as to include a whole bunch of people who today are excluded from the labour market as if they were a ‘B economy,’ Argentina is increasingly split. You are surely going to have some public-sector streamlining so as not to cause new deficits in the future. The issue of state companies, for example, is something which needs looking at. You’re going to have to redesign social and labour policies. To me, they’re both basically the same thing to integrate people because unfortunately austerity will not come free from the viewpoint of activity while today you cannot, neither here nor anywhere in Latin America, neglect your social front. You need to mitigate the impact of austerity on the losers, above all the most vulnerable. 

All you have to do in the first six months is to wait for the private sector to invest the money which the state does not have to drive the economy. If you do not grow in the first year, it’s going to cost infinitely more to maintain that structure of price contention, which is to win time, to give a safe footing for a sounder growth. But that’s only the first chapter. If we think that by lowering the inflation of the second half of 2024 with stabilisation, we have won the battle, we are going to have the same defeats as with previous bids.


You say that it’s probable that a deficit of 1.5 percent of GDP on top of the real deficit will be reached by postponing payments and with creative accountancy, how much do you think the deficit would be at that point, another 2.5 percent?

We hope that it will be as small as possible. According to the estimates of analysts, so as not to give mine, the consensus is that it’s going to be around four percent.


2.5 + 1.5. 

All that this government can do, to do part of that job, will not only be thanked by the next government but by the country because the more you delay, the greater the sacrifice. 


Can four percent of GDP be lowered without social chaos?

That’s the million-dollar question. It has to be done with great intelligence. If you ask me, it’s pretty difficult and even improbable but this government, and above all the next, has to do everything necessary to reduce it as much as possible. Because in the end, although this is difficult to explain to people, today’s deficit is next year’s stagflation, poverty and inequality. It’s very difficult to explain but I can explain it to you. So once again, the effort has to be made intelligently. This is not trivial because one is always thinking of pensioners and social welfare beneficiaries but a great part of that deficit is associated with malpractice or pretty inequitable political privileges which have been maintained by government after government in Argentina. We have subsidies for the middle class which have been naturalised and which need to be taken away. People do not like their subsidies being taken away, not even the people who can pay them and when I talk about the people losing their subsidies, they’ll be paying a bit less than in Uruguay or Chile. But there are also many transfers to businessmen. We have promotion regimes, and cheap credit and dollars which feed the profits of certain powerful market sectors. Here nobody is either good or bad. You set rules which distort and the capitalist, the businessman or the family will consume and make decisions according to those rules. People consume more energy in Uruguay or in Chile because it’s cheap. The people are not to blame, the cheap pricing is to blame. Here more dollars are purchased and hoarded, imports are increased and the payment of debts brought forward because nowadays it is gifted. The companies are not to blame, the Central Bank is to blame because they are giving away the dollars. So there are some fronts which can be touched up to make this fiscal consolidation more equitable but it will face the reaction of the voters. That’s why I tell you that in the final analysis the decision is going to be political because basically the only way we are going to come out of this in a stable fashion is to stop naturalising the immense quantity of privileges and benefits which the state bestows without having the funds.


Is there no plan which does not generate recession initially such as those plans which rapidly produce by their enormous reduction of inflation a situation of relief like convertibility or the Austral Plan? Are they no longer possible because inflation of 300 or 800 percent is not the same as 100 percent?

The relief will be generated by lower inflation. Now, if you ask me whether we are going to have a boom in the demand for jobs at the outset of the plan, that is more difficult to anticipate. That is going to depend on many other things which will have to be done within the window given by the plan: the reforms, the tax simplification and some well aligned programmes of incentives – not incentives which compete with employment but which favour it. But the truth which should be said now at this stage is that this can be done because it is more popular but there is no magic. 

At the start, the relief will be from the inflationary tax now collected from us which we suffer with increasing visibility. It will fall and it will not fall immediately, possibly after some months. I do believe that there will be sufficient relief to give political backing for other measures. But the sequence is very delicate, I would almost say surgical for the kind of intervention needed.


One hypothesis considered by political analysts is that an adverse ruling against the vice-president in December or February, before or after the court holiday, will boost the discontent of Cristina Fernández de Kirchner, leading her to break up the governing alliance and concentrate her forces within a smaller but more intense sector. And fracturing Frente de Todos could trigger the break-up of Juntos por el Cambio without the threat of a competitive governing party. And in that context, as has been recently happening along the Andes, somebody with 20 to 22 percent of the vote in the first round could become president. In that kind of situation, could an audacious Massa without political support but with emergency decrees launch something like the Real Plan to win the elections, garnering results over nine months although not sustainable in the medium term?

In economics I often say that there is no such thing as a scenario with zero probability, basically because we work with continuous distribution, but there are scenarios with very low probability. I think that there is a low probability for what you say but I think it’s worthwhile adding something which I think is important. Two things, one of which I personally believe along with many colleagues of the Cambiemos coalition [now Juntos por el Cambio], our need today is less to win than to govern. So if we are heading towards that recent Latin American scenario, everything I told you before, all that programme would be impossible to implement, forget it, it won’t work. I really hope that we are not heading towards that scenario, because with that fragmentation, that scant political power, none of the necessary reforms...


… will be possible.

And we already have nothing in the tank. Chile does, Colombia does. They have very low levels of taxation, typical of middle-income countries – since they have middle-class and upper-class incomes, they can raise taxes, have access to the market and finance transitory errors. We have nothing in the tank. So political fragmentation and improvised economic policies in Argentina are terribly damaging because there is no safety net left. Besides which we are coming from 10 years of labour exclusion, increasing inequality and two extremely tough years of pandemic. Society cannot take it any more. So that scenario that you are telling me about is the worst scenario possible. 

I think that politicians and the Cambiemos coalition understand that. And if the coalition stays united, that strategy you mention on the government’s side does not make much sense so I think that in the end it’s not going to happen.


They’ll stay united.

They’ll stay united, they will minimise their losses by sticking together. And on the other hand, while I do not know Cristina, I would imagine that she learned from the Chacho Álvarez [vice-president who resigned in 2000] episode , abandoning ship has a very big political cost, in general and in Argentina in particular. So I really don’t think that there will be a break-up in that sense, even though it will surely be given thought in many cases. I understand the analysis of those scenarios but my basic scenario is this – reaching [the elections] any which way so that the deterioration is not exponential and then alternation [in government].


Your analysis is that even if things happen that way, the motivation for Juntos por el Cambio staying together would not be to win the elections but to be able to govern afterwards, for which the incentives would be equally aligned to stay united although they could win apart.

I think there must be great insistence on that, I’m convinced of that. It’s very difficult. You asked me if we could do it in 2024, I don’t even know today how we are going to arrive into 2024, but we’re clearly not going to arrive much better than now, possibly worse. You asked me that and my answer tried not to sell you smoke and mirrors, it will be difficult. 

Can it be done? Yes it can with political backing, with vocation, with a president not afraid to lose in the first six months an image which will be recovered later on, like [Emmanuel] Macron in his time. Now with a government emerging from a four-pronged election, that would seem to me impossible. And that must be made clear among politicians, the volume, the consensus, the political support, even abstaining from an obstructionist opposition. That is a necessary condition.


Producción: Sol Muñoz and Sol Bacigalupo.

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Jorge Fontevecchia

Jorge Fontevecchia

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