Martín Guzmán puts an anchor on monetary expansion

The decision was communicated by the Minister of Economy during his presentation in the Budget and Finance committee of Deputies, together with the ratification that a price agreement with the private sector will be advanced as of January 7 that replaces the current freeze of about 1,400 products.

As the staff of the IMF In its statement last Friday and official sources indicated, both points were part of the policies to reduce inflation that were discussed in Washington during the visit of the delegation from the Ministry of Economy and the Central Bank.

In the Government they celebrated that the staff statement once again admitted that to attack the inflationary process a multiple approach is required and that it included among the necessary measures “a coordination of prices and wages”. Although the Fund also emphasized, according to its usual recipe book, “a reduction in the monetary financing of the fiscal deficit” and “an adequate monetary policy with positive real interest rates.”

All three aspects were reflected in Guzmán’s presentation. On the one hand, the official ratified the macroeconomic projections for 2022 included in the project three months ago (see separately), as an activity growth of 4%, which was a point of debate with the agency. But, on the other hand, he argued that inflation was the main economic problem of the year (it had projected 29% but is heading to close at around 50% annually) and assured that attacking it “is a central objective” of the Government. In this regard, he stated that the roadmap for next year “assumes different hypotheses than 2021 for nominality”, which are in line with some of the Fund’s requests.

Specifically, the minister recalled that for 2021 a growth of the monetary base (the pesos in circulation plus the reserves of the commercial banks in the BCRA) of 1 percentage point over the GDP was assumed in line with a forecast of demand growth of money also of 1 point, something that admitted that it did not happen since in practice a fall was registered. And he noted that, along with the jump in commodity prices and inertia, that “also put additional pressure” on inflation.

“For 2022, we assumed stability: a non-growth of the BM, starting from a smaller base. We consider it a conservative hypothesis, which will have to do with the evolution of a set of financial conditions in which we are working, ”said Guzmán. An official source consulted by Ámbito explained that this addition, which is in tune with IMF proposals, will imply that monetary expansion will now depend on the growth of nominal GDP and that the idea is that the base grows in the same proportion.

In November, according to the Central Bank’s monetary report, the WB stood at 6.2% of GDP, a value similar to that at the end of 2019 and well below the average for 2006-2017, when it was around 8% or the 9% of the product, and also from 2020, when it reached 10% in the months of stricter quarantine and full validity of the IFE and the ATP.

This means that, in fact, there was a contraction in the relative weight of money in circulation, on the back of the strong sterilization carried out by the BCRA through the placement of Pases and Leliq to avoid further overheating exchange rate pressures. In this sense, the financial analyst Christian Buteler said that “what this aggregate tries to do is to generate some kind of anchor for the issue (in this case the GDP) and in this way it also seeks to anchor the expectation on inflation.” Buteler considered it “positive”, although he warned that the absorption of liquidity via remunerated liabilities of the Central is not harmless for prices either.

Funding and rates

Regarding the reduction of the financing of the fiscal deficit with monetary assistance from the BCRA, one of the main demands of the Fund (which also seeks a faster adjustment), Guzmán ratified the original financial plan for 2022. It proposes to cover the funding needs (4 , 9% of GDP) with 1.8% of GDP of monetary issue, 2% of net debt in pesos and 1.1% of net resources from international organizations or bilateral loans. “We are working with the international community to obtain the greatest possible support from other multilateral credit organizations and multilateral development banks to be able to reduce some more the monetary issue in 2022,” he said.

Regarding the interest rate, the minister validated the need to maintain a positive real yield to discourage dollarization. An eventual movement in rates is something that the economic team already thinks about, in line with the rise in the rate of depreciation to bring it closer to the evolution of inflation that Ámbito had advanced and confirmed by Miguel Pesce. In this sense, Guzmán confirmed that the exchange rate anchor will be abandoned in 2022 and that it will seek to keep the real exchange rate stable, but flatly ruled out a devaluation jump.

Beyond these gestures and the progress mentioned by both the Fund and the Government, the technical understanding with an IMF that does not abandon its spirit of adjustment is not yet closed. The staff statement already announced that “more discussions will be necessary” and Economy sources already recognize that, although it is still an objective to reach an agreement before the end of the year to refinance the US $ 45,000 million of debt that Mauricio Macri took. Perhaps it will last until the first days of January. The next step will be the presentation of the multi-year plan, for which Guzmán requested the support of the opposition. In addition, he promised again that the program will include a cut of the primary red but without adjustment, and that it will aim to give continuity to the reactivation. Meanwhile, the ruling party will seek to approve the Budget this week in Deputies and that the Senate treat it before Christmas.