Inflation, energy and war: the new world scenario

Since no one rules out the possibility that the conflict could expand, the countries have begun an increase in defense spending. It should be noted that this will result in an increase in fiscal deficits, which will surely be financed with issuance or debt, in both cases the consequences will be harmful to the economies, there will be inflation or a rise in interest rates, this implies that the world It will grow less than expected.

Russia is an exporter of raw materials, the world will turn its back on Russian products, it will be difficult immediately to find alternative suppliers, these raw materials will not be able to be transformed into finished products at the same rate as in the past, the unit costs of companies will increase and this will bring with it a generalized inflation.

In short, more currency issuance on a global scale and scarcity of raw materials will leave us with higher international inflation as a result. To this we must add the cut in the supply chain, freight that will be more expensive and insurance that will increase in the face of a higher risk scenario, all this invariably leads us to a very complex situation.

Argentina, Alberto and the IMF

The president’s speech at the opening of the regular sessions of Congress did not address structural issues, Argentina has several challenges that will only be resolved with the consensus of the political class.

1. Argentina needs to have fiscal balance, the fiscal deficit is the sum of the primary result plus interest payments, Argentina has a deficit of 4.6% of GDP. To reverse this result, joint work and common objectives of the entire political class are needed, this was never discussed in Congress.
2. Inflation in Argentina should be around one digit, currently we have an inflation of 50.7% in pesos and 30.4% in dollars, I haven’t heard how we will lower these levels of inflation that make us less productive.
3. We urgently need to recreate the entry of dollars into the country, according to the report of the Central Bank in the exchange market for the month of January we had a deficit of US$ 486 million, and it was not higher because there was an advance of exports. To this must be added card payments for US$197 million. If we don’t have a plan for more dollars to enter, the Central Bank will run out of reserves (there are already very few) and the market will push a devaluation of the official dollar.
4. An economic plan was not made explicit to be able to grow in the coming years, we do not have an incentive for new investments to arrive, we continue in an economy with strong restrictions on buying dollars and remitting profits abroad. The world’s investors will never bring dollars if there is no adequate legislation that allows them to recover them and remit them to their parent companies.
5. There is no labor reform, nor is there an incentive for investment so that they can create more jobs. To continue thinking that employment is going to be generated by the State is an illusion, the private sector only grows when there is investment.
6. There is no pension reform, that is also a big problem, without said reform, pensions will continue to be paid with State tax revenues, that subtracts money for infrastructure and does not create jobs. It would be necessary to rethink measures to be able to pay pensions with genuine income from Anses, create space for more people to work and make contributions to the retirement fund, which would reduce the fiscal effort of the State.

Conclution

• We are going to a world scenario of more inflation, rise in raw materials, increase in interest rates and problems to obtain financing on a global scale. If all the countries go out to seek financing, the large volumes will be blocked in those countries that have a better credit reputation, the countries that do not pay in a timely manner will have little and expensive financing.
• You shouldn’t be happy because the price of soybeans, wheat and corn goes up, you have to look at the fact that the price of oil, gas and electricity also goes up, Argentina is not self-sufficient in these products, and the worst thing is that market prices domestic are unanchored from the international ones. This implies that we have a very important suppressed inflation, by 2022 inflation will be higher than 70% per year.
• The flow of pesos from the Treasury is negative, and little is done to stop having a budget deficit, we have pesos left over in this scenario, that is the main and only cause of inflation.
• The flow of dollars is negative, so we lack dollars to produce and grow. It is impossible for us to have more quality employment if there are no dollars for production. There is also no plan to encourage investment.
• The agreement with the IMF is very good since it postpones large-scale debt payments from the short to the long term, however, it is a necessary but not sufficient condition for growth.
• The positive externality of the agreement will be a substantial improvement in country risk, rise in the price of bonds and shares. The negative externality is that the State will have to finance the deficit with domestic credit and this will result in a rise in the interest rate. Illiquidity is not a friend of growth.
• The country has been hit by a succession of bad governments that have not made us grow from 2011 to date, to this we must add a global pandemic and now a war. The solution in an economic plan agreed upon by the political forces, it would seem that we are not lucky at this point, those who speak seek the right words for discord and those who listen leave, so it is impossible for us to grow in the year 2022 and let’s go head to a scenario of high inflation, praying that it does not reach triple digits.

Economic, financial and business analyst, lecturer, researcher and private consultant.