Inflation
The Government defined that the decrease of the inflation It is an exclusive objective. This is consistent with the fact that last year and for much of 2024, the inflationary issue was the central concern of the majority of the population. Now, poverty, employment and wages are becoming a growing concern.
Milei’s victory in 2023 partly responds to the anti-inflationary promiseAnd their electoral destiny is largely tied to showing results, beyond the level of activity. Alfonsín in 1985 and Menem in 1991 launched inflationary plans that gave them a victory in the elections of those years. The same occurred with Duhalde-Lavagna in the Kirchner victory in 2003.
Mauricio Macri lost the elections by doubling Cristina Kirchner’s inflation. Unión por la Patria lost them by doubling the inflation it inherited from Macri.
The Government achieved a decrease in inflation in 2024, but for now it finds a floor similar to that of 2022 between 3% and 4%. The expectation was to be able to achieve an inflation that starts with 3 to consolidate an image of the Government that is at high levels but declining and to avoid an appreciation of the real exchange rate, given the monthly devaluation of 2%.
Not only was the 4.2% monthly figure not a favourable figure, but the rise in core inflation (which excludes seasonally volatile products and regulated prices) rose for the second consecutive month to 4.1%, the highest value since April.
Although the Government may lower the index in the coming months, depending on some decisions it makes that are not without costs, the truth is that inflation refuses to fall below 3% per month, a floor that has hardly been breached since March 2018.
Different governments are appealing to anchoring certain prices in the economy. The Austral Plan and Convertibility had some successalthough temporary in the first case, because they generated a consistent and comprehensive plan that attacked all the factors together. In addition, they started from a very high exchange rate after a strong devaluation and wage liquefaction.
Macri’s government tried to apply a monetary and fiscal anchor after the program with the IMF, but underestimated the exchange rate issue and the devaluation jumps with capital flight fueled inflation.
The program of Alberto Fernández and Martín Guzmán had an exchange rate and tariff anchor since 2021 but could not sustain a monetary and fiscal anchor that could break inflation. Especially after the global inflationary jump in the Ukraine War that led to more restrictive policies in both developed and emerging countries.
Milei’s government is applying fiscal, exchange rate and, to a certain extent, monetary anchors, but in order to lower inflation to 2%, there are unresolved factors that are putting pressure on the objective.
The first issue that has not been addressed since indexation was resumed more than 15 years ago is the curbing of inertial inflation, which establishes an inflationary floor that varies between 1.5% and 2% per month. The Austral Plan established the deregulation and Convertibility prohibited the indexation of contracts, a limitation that remained after 2002, although reality later reinstated it outside the legal limit.
It is not enough to peg the exchange rate, use a fiscal anchor or try to set wages below 2% per month if other prices drive up costs that put a higher floor on the index. An expected labor conflict will be a tough test to see if the Government can impose the wage anchor if prices outstrip wages in the coming months.
The second issue is that the increase in regulated prices (every other month) accelerates inflation, as has been observed in recent months. The increase in regulated prices greatly exceeds core inflation and raises the general index, with second-round upward effects on all prices.
Although there are prices such as energy that have returned to 2019 levels, there are salaries and prices that are “outdated”. In addition, the Government linked tariff prices to the exchange rate, which causes the exchange rate to be adjusted, which is now very delayed (at pre-devaluation levels of August 2023 and even October 2023, when the exchange rate jump in August was diluted by an equivalent price jump).
A third issue is that credit is growing very strongly, 12.4% in real terms in August and consumer credit is growing by 17% in real terms. If demand increases without an increase in supply, there will be inflationary pressures.
In this area, as well as in the area of tariffs, Sturzenegger’s statement that if certain prices rise, demand for other products falls and increases are offset by decreases, requires a greater recession in the economy.
What will the government do? Will it lower rates? Difficult in the immediate future. Will it reduce credit? After the bad data, the Ministry of Economy had to raise rates in the bond auction. It does not seem enough to limit credit in the short term. But if inflation stabilizes, the demand for credit will find limits due to the greater indebtedness of families, which can cause family insolvency and greater default in the banks’ portfolios.
The government will certainly be able to stabilise inflation by adjusting tariffs and credit, but it will be difficult to reduce it further, unless the economy cools down further.
As we have been saying, without a Stabilization Plan that addresses all the causes of inertial inflation, curbs current pressures and changes future expectations, it will be very difficult to significantly lower the level and dynamics of prices in a sustainable way and achieve genuine growth.
Can the government survive until October 2025? Let’s look at the exchange rate issue.
Exchange rate anchor
It is increasingly evident that the end of the currency controls will be, at best, after the 2025 elections. With the currency controls, the Government will be able to maintain the equilibrium of the exchange market for just over a year, clearly without restrictions the necessary exchange rate is higher, but at the expense of the recovery of the economy due to both the delay in the entry of foreign currency through direct investments and the natural brake on imports, derived from a negative level of net reserves that will be lower in the coming months.
This is because there is no sign of a strong inflow of capital from international organisations or from debt in the market, except for YPF and some companies, at these levels of country risk and exchange rate.
The government will probably make symbolic relaxations of the restrictions, due to their low impact on the balance of payments, as well as to improve the social mood (e.g. for the purchase of housing) or to improve the business mood (flow of profits and dividends in cash). But it is impossible to free up the savings dollar, which in years without restrictions such as 2007 implied an outflow of US$ 15,069 million and in 2017 a decrease of more than double US$ 32,919 million.
A complex issue will be the management of devaluation expectations, not only because of the greater appreciation of the exchange rate but also because the tension will return among exporters who will delay settlement next year in the face of a possible post-election devaluation, in addition to the acceleration of higher import payments. With export revenues reduced from $34.9 billion to US$29.5 billion due to lower commodity prices, climate issues and jitters.
A double clamp (more import payments and less export receipts) that historically increases the external restriction when devaluation expectations rise and the political scenario is uncertain or changing. The travel and other card payments bill is also growing strongly this year and will continue to be a major drain on reserves at this exchange rate.
Fiscal anchor
August showed a primary surplus of $455.16 billion (half of July) which, when interest is incorporated, results in a negative financial result of $1.92 trillion. Mainly due to a drop in income despite the moratorium.
Tax collections in August reached $11.7 billion, with an annualized drop in real terms of 13.7% (including moratorium). During 2024 the real drop is 8%.
Overall, taxes linked to economic activity fell by 16.7% in real terms in August. In the year-to-date, a negative variation of 9.4% is observed.
Accrued primary spending fell by 25.7% year-on-year in real terms in August. Considering the first eight months, the real contraction was 30.4% year-on-year. But if total spending is considered, the real drop in spending is only 12.4% because interest payments rose by 55.8% year-on-year.
Among the accrued items with the greatest real adjustments compared to August 2023 are transfers to provinces (-67.6%), public works (-63.1%) and spending on social programs (-54.1%). In the case of pensions, there was a 9.6% real reduction in year-on-year terms. Only family allowances and AUH increased by 24% year-on-year in real terms.
Starting in September, the PAIS tax will be lowered, which will imply an additional loss of resources. If the economy recovers, tax collection will improve, but there will be more inflationary pressure and pressure from the external sector. A delicate dilemma for the Government. We assume that it will try to lower inflation by any means, perhaps with a tariff anchor near the elections.
I am writing this column hours before the President announces the macro-relevant data of the 2025 Budget. The Government promises that it will maintain a zero deficit. A memory that takes us back to repeated unfulfilled promises or bitter realities such as in 2001 and 2019.
The question is whether the government will be able to manage the approval of laws with the brutal restrictions that we have pointed out in public works, transfers to provinces and social programs, with a level of activity that reduces income and requires more cuts, or will eventually force it to relax the monetary anchor or resort to greater indebtedness.
Will the provinces give legislative support to further adjustments that also affect their management and in view of an election year? Perhaps the Government would prefer not to approve the Budget and govern with this year’s budget, which implies maintaining cuts and greater discretion in execution.
The Budget is an excellent opportunity to achieve sustainable finances and tax equity. If the country does not have resources, it cannot sustain unfair exemptions, buy warplanes or increase funds to the SIDE if there is no money to restore income for retirees or essential public works. Milei won promising to adjust the caste, but the only real adjustment was on the middle class and workers, especially informal and public sector workers.
Just as inflation requires a consistent Plan, the fiscal issue is resolved with growth and by taxing both high incomes and assets and exempt activities with high tax avoidance.
If the government does not have a majority, sustainability requires the legitimacy of a citizen consensus and legitimate and transparent political agreements that do not compromise on positions or funds. In addition, it requires a comprehensive program that moves away from certain fiscal dogmatisms, as it did in the exchange rate so as not to repeat Macri’s experience.
It is about the virtuous sum of all the anchors to avoid hurricane winds and return to a certain course. The country needs a navigation pilot to close the gap and adjust the model to reality, in addition to a good navigation plan, otherwise Argentina will continue like a ship adrift and beyond the fact that the global climate predicts tailwinds with the drop in rates in the United States and Europe, it is worth remembering Seneca when he said that “there are no favorable winds for those who do not know where they are going.”
Source: Ambito
I am a 24-year-old writer and journalist who has been working in the news industry for the past two years. I write primarily about market news, so if you’re looking for insights into what’s going on in the stock market or economic indicators, you’ve come to the right place. I also dabble in writing articles on lifestyle trends and pop culture news.
