After the defeat in the September’s PASO primaries, the diagnosis by Argentina’s government was that the ruling coalition had lost primarily because of the economy. The sentiment was expressed explicitly by Vice-President Cristina Fernández de Kirchner in a letter in which she spoke of wage arrears and uncontrolled prices, while criticising the fact that in the midst of a delicate social situation, the deficit as of August was only running at 2.1 percent of GDP.
Despite focusing its post-PASO efforts on the economy, the government has received two pieces of bad news as the campaign enters its final stretch. On Thursday, just three days before voters head to the polls, October’s inflation rate will be published by the INDEC national statistics bureau. According to private consultants, it will be between 3.2 percent and 3.6 percent. Meanwhile, tensions are growing on the foreign exchange front, with the so-called ‘blue dollar’ reaching a record high last week due to greater hedging in the face of political uncertainty and rumours of an imminent post-election devaluation.
The government’s strategy to moderate inflation has been unsuccessful and the exchange rate gap (between the official and the parallel markets) is close to 100 percent. The blue dollar this week reached the psychological barrier of 200 pesos – a value that the Alberto Fernández administration wanted to avoid. Economists warn that it may impact further on some prices.
This worrying combination, coupled with the lack of progress on an agreement with the International Monetary Fund (IMF) last week pushed Argentina’s ‘country risk’ rate to its highest level since the debt swap in September, 2020.
Why and how has this situation arisen? Economists argue that there was "a misdiagnosis" by the Fernández administration and that the measures adopted post-PASO by officials – such as price controls, money-printing (to finance the ‘Plan Platita’) and the tightening of currency controls – have only "deteriorated" inflationary expectations even further. Add in fears of a devaluation, plus the rearing of internal conflicts within the ruling coalition after its defeat in the primaries, and there are clear doubts about the direction of the country after November 14.
Juan Luis Bour, chief economist at FIEL, told Perfil that "the diagnosis was wrong: they believed that there was not enough deficit and therefore increased spending financed by issuing currency, which accelerates inflation and expands the gap."
Soledad Pérez Duhalde, of Abeceb, expressed the same view.
"The diagnosis is wrong and the economy cannot be fixed in two months." she said. "They are going into the elections badly because the combo of measures and post-PASO internal politics generated greater uncertainty. The only thing they did was to control prices, which further dampens expectations."
In this respect, she said that "ironing out utility billing and freezing prices may serve to mitigate inflation in the short term, but it makes us discount future corrections."
According to Abeceb's estimates, inflation has a floor of 50 percent next year due to the level of money-printing which will be required to finance a three-percent deficit, but in a negative scenario (a devaluation leap) it could end up at 61 percent.
Pérez Duhalde questioned that "in economic terms there is no effective fiscal, monetary or exchange rate anchor," while stressing that "the 'mother' of all anchors that is missing is politics: with a weakened government and tensions in the governing coalition, there is no clarification over the direction of economic policy, the agreement with the IMF is on hold and there is no stabilisation plan in sight."
Sebastián Menescaldi, of Eco Go, agrees that "there is a deterioration of devaluation expectations going forward and that is what is negatively impacting both the exchange rate and inflation. One increases the price preventively because you don't know what is going to happen after the election."
Aldo Abram, of Fundación Libertad y Progreso, said that "the increased issuance is causing the value of the peso to depreciate more and more" and that with "the excess of money in the pocket, the trader, the industrialist, due to the uncertainty ahead, is putting it into the foreign exchange market." In this context, he forecast that the ‘blue dollar’ would reach 220 pesos by the end of the year.
For Andrés Borenstein, of EconViews, the government "approaches inflation in a way that everyone knows does not work. Between the issue and the inflation and devaluation expectations implicit in the blue and the CCL [exchange rate market], there is no anchor."
In his view, "it has come to this because the government does not provide a consistent discourse. One day it says to businessmen 'we are going to agree with the IMF,' and another day [it says] 'we are not going to get on our knees'. If after the elections, the government unifies a discourse of reaching a quick agreement with the IMF, the alternative rates could go down," he said.
Menescaldi agrees that in order to provide certainty, it is important to reach an agreement with the IMF “as soon as possible."
Economist Iván Carriño meanwhile attributes the uncertainty to "the government’s post-PASO attitude, with a radicalisation of discourse, in line with the Camporista vision of the economy that prices must be controlled and that there is no need to pay the IMF.”
He explains: “That generates more uncertainty, and investors take refuge in the greenback."
As to whether the so-called ‘Plan Platita’ (putting money into pockets) will convert into more votes for the ruling party on 14 November, Menescaldi said: "It implies 0.3 percent of GDP. There was an improvement in income at very low levels, [but] it was not felt in the pocket, [and] it was not reflected in more consumption. I estimate that it was used to pay off debts or for minor savings."
Impact on prices?
Contrary to the statements of presidential spokesperson, Gabriela Cerruti, economists are warning that a blue dollar at 200 pesos per greenback and an exchange rate gap that is running close to 100 percent could be transferred to prices.
Abram explained that "it is true that it will not affect the prices of products tradable at the wholesale exchange rate, but there are a lot of goods dependent on the parallel market because they do not sell at the official dollar rate."
Federico Moll, from Ecolatina, indicated that the extreme gap between the official and parallel rates would “affect the transactions of companies which cannot access the official dollar and also the expectations of suppliers who have to decide prices,” as well as exporters who delay "selling and wait for an exchange rate jump and of importers who, for the same reason, seek to import as much as possible."