The bid between the exchange rate and the level of interest rates characterizes the current monetary and exchange rate policy. Any attempt to reduce the rate finds an audience that reacts by abandoning its preference to keep its savings in pesos and moving to the dollar. Then your quote increases. The government fears that circumstance and the Central Bank is pushing for an increase in rates in the next Leliq tender. The circle continues to operate in a vicious way. The increase in rates generates recession, which is as pernicious and undesirable an effect as devaluation and inflation.
The demand for dollars in Argentina today, is not only for imports and the payment of services act. It is also the dollarization of portfolios and the conversion of savings. According to Credit Suisse data so far in 2019, the private sector bought 36,800 million dollars. This amount exceeds that of imports. This trend has accelerated, since the annual average of the three previous years did not reach 20,000 million. The reason is the sharp drop in confidence in our currency, which is not a novelty for Argentines. It is a phenomenon that must be analyzed sociologically since it responds to sufficiently large and dispersed markets. We would be mistaken if we imagined conspiracies of economic groups or political sabotage. There are thousands of individual decisions of savers, managers or administrators that can only be corrected by a convincing blow of confidence.
The speed of circulation of money allows monitoring the risk of a new run. The hyperinflation of 1989 showed that even if the monetary issue was contained, the same inflationary effect could not be avoided if money began to circulate more and more rapidly. In February 1989 the M1 (bills and coins plus current account deposits) rotated every 7 days. In July of that year, already in full hyperinflation, the M1 rotated every 3.3 days (see “The Hyperinflation of 89“, Manuel A. Solanet in Spanish). A little over a year ago, in February 2018 the rotation of the M1 took place in 20.8 days. A month ago, in February 2019, it went down to 14.6 days. We are still distant from those moments and the Central Bank has more reserves than in 1989, but a yellow light turns on.
How is this fall in confidence explained?
There are two types of reasons: economic and political. Among the first we must mention those that emerged in April 2018 and produced a run on the dollar and a devaluation of more than 100%. The assistance of the International Monetary Fund was required, although the agreed program had to be reviewed shortly. The expectations stabilized. The government agreed to reduce the primary deficit to zero in 2019 and is complying with it. But for the most careful analysts, there are weak flanks. The containment of spending is based on a hardly sustainable reduction in the real level of public salaries, pensions and social plans. In addition, there is freezing of items without a rationalization that accompanies and there are delays in the payments of suppliers and works. If the provinces and municipalities are considered, the total number of public employees has not decreased. Neither has the number of beneficiaries of social plans been reduced. On the other hand, even if the primary result is resolved, there will still be a financial deficit that increases due to the growth of public debt and the level of interest paid for it.
It is worth remembering that this complicated fiscal situation has a starting point inherited from Kirchner’s management. The mistake of this government was to face it with a gradualism that led it to borrow beyond the limits and with a growing rate, unacceptable for international markets
The risk of political origin is linked to the likelihood that the next elections will give victory to a populist government. Despite her blatant corruption, Ms. Kirchner’s shadow threatens increasing percentages in the polls. The hypothesis of its sure defeat in the ballotage begins to be in doubt. The alternative that she desists to be a candidate also generates concern. In that case, a candidate that integrates the Peronist spectrum must surely incorporate legislators and conditions of those who would provide the highest percentage of votes. A coalition of that political sector, even if it has a candidate like Roberto Lavagna, seems far from the ideas that support the reforms required to overcome the fiscal deficit and to achieve competitiveness.
A quick recovery of confidence that dissipates the risk of an uncontrollable flight of the weight can be imagined according to two alternatives. One of them would be a strong recovery of leadership of Mauricio Macri through structural reform measures submitted to Congress and anticipated by decrees of necessity and urgency when necessary. Among them, the labor reform, the start-up of the restructuring and rationalization of the national government, the tax reform and the purification of social plans.
Another alternative would be a broad political agreement that includes moderate Peronism, to carry out these reforms but defined by their instruments of execution and not vaguely by objectives. This alternative would seem more promising, but it is scarcely probable in the Argentine political culture, formed and adhered to the forms and ideas that founded our stagnation and the imbalance that we currently suffer.
Dollarization would be the shortcut to avoid the acceleration of inflation that would accompany an eventual uncontrolled flight of local money. This happened in 1991 with the convertibility, which was a dollarization dressed. The current level of the available reserves of the Central Bank would allow transforming the entire Monetary Base into dollars. In this way, inflation would be overcome, although not the possibility of a default, as occurred in 2001. The reduction in country risk would, in any case, be subject to the reduction of public spending and fiscal consolidation. Strictly speaking, this is the mother of the problem: if Argentina had achieved a solid and permanent fiscal balance, we would not be suffering from the problems that motivated these lines.
By Manuel Solanet
Director of Public Policies Libertad y Progreso