We remembered a Three Stooges movie. Early in the morning they would take rats and cockroaches and release them in a house. In the afternoon they presented themselves as a company of pest exterminators. They inaugurated the highest twin deficits in 35 years, and later arrived with the IMF to reduce the imbalances that they themselves had created.
With the final data of October 2018, a reduction in the primary deficit was observed, which was in line with the IMF, exceeding the agreed annual goal for 2018. In the first ten months of the year the primary deficit amounted to $170 billion , presenting a year-on-year drop of 33%. This decline in the primary deficit was achieved from income that showed an increase greater than primary spending. Of course, it was not because the reactivation of the economy had boosted the collection, but rather because of the strong increase in property income due to the interest income obtained from the Treasury’s time deposits in the Banco de la Nación Argentina.
On the spending side, in those 10 months of 2018, there was a 6.5% year-on-year drop in real terms. The largest adjustments had been made in public works, transfers to provinces, the deficit of public companies and state salaries. With these data, the primary deficit accumulated $359 billion in the last twelve months (IMF target), being below the agreed annual target of $370 billion. This situation left room for an increase in public salaries, promoting the plan “Merry Christmas; Ho, Ho, Ho”, which included advances of salaries and bonuses for state employees, retirees and some additional social plans.
But the truth is that the real drop in collection was going to be accentuated by the recession. The Treasury would not have 2018 property income in 2019. A good part of the deposits in the BNA should be used to pay obligations in pesos in December. It was impossible for subsidy spending to show a real drop in 2019 like the one projected by the government. In order for it to be feasible, the electricity rate would have to increase by at least 60%, the pension expense, in addition, social spending was going to accelerate since it was indexed by the past inflation of the last six months, and the rise in prices would make will increase.
The verve of the IMF II agreement was super pleasant for the environment. The exchange market became bottlenecked, the dollar fell from $41 to $37, the danger of an inflationary spiral that was underway subsided, in November it fell to 2.7%, after the peaks of the previous two months. This is how “the ghost of B” was managed for a year, then the default in pesos or 2019 reprofiling would arrive with the advance payment of the IMF disbursements. But he never lowered the country risk that exceeded 700 basis points for fear that the three stooges “would crash it again.” The doubts that the financing of the public sector held in 2020 were extraordinarily high. After completing the goals that the IMF set for October, everything indicated that the second best team, would approve the “matter that was taken” to December 2018.
The previous matter was rendered with a 10exceeded the fiscal goal for the end of September, the monetary goals for October-zero issuance of the monetary base, went up to the reserves canvas and everyone happy except the people. In October, the monetary base goal was exceeded because the expansion of pesos due to the disarmament of Lebacs was more than offset by the absorption of Leliq, the purchase of Treasury dollars from the BCRA and other contractive factors such as BCRA profits in the market dollar futures. In November, the BCRA did not have the latest earnings services and the dollar futures market, however, it once again exceeded the base target.
In November, the issuance of $122,000 million for the disarmament of the Lebac brought the monetary base to $1,384 billion, this made the dollar jump to $39 (+7% in two days). The increase in the base jeopardized the possibility of expanding in December, according to the goal agreed with the IMF. In other words, at the end of November the monetary base was already 2.5% above the December goal, but inadequately in recent days it absorbed $105,000 million with Leliq, closing the month with a level of monetary base of $1,280,000 million that would allow taking advantage of the higher seasonal demand for cash and credit in December.
Simultaneously, economic activity was expected to stop falling in the first quarter of 2019. This forced optimism had no basis in reality. It was based on the assumption that real wages would stop falling between December and February with the reopening of parities and the deceleration of inflation to a monthly average of 2.2%. The members’ platform said: “starting in the second quarter of 2019, there is an opportunity to energize a recovery, due to the expectation of a super harvest.
However, 2018 would experience a drop of (-2.6%), showing that in the fourth quarter the year-on-year drop was (-6.5%). The generosity of the economists friends of Cambiemos in the private sector was eloquent. Regarding inflation, a slowdown was projected in 2019 to 25%, after a 2018 that would end with inflation of 47%, even with very harsh monetary restrictions, very high interest rates and a drop in credit.
THE DANGERS FACING THE GOVERNMENT
The true polls began to show that Macri was losing, which would drive up the country risk, and would make it difficult to renew Letes in the local market. These financial issues would destroy any hint of future economic recovery.
If the dollarization of portfolios grew, it would impact the price of the dollar. Although to face the demand for dollars they counted on the supply of foreign currency from the harvest, we all knew that inflation would drop less than what was vaunted. The monetary program could not in any way lower inflation to 25% in 2019, after all the ineptitude of those who had connected the inflationary inertia cable to double, adding expectations of wage and rate adjustments. A new appreciation of the peso to slow down inflation, given the high real interest rate, would irreversibly compromise activity. They should have admitted then, the difficulties they would have in meeting the goal of “zero primary deficit” in 2019, since the recession would accentuate the real drop in revenue.
But the worst thing would be that they were not going to be able to renew the short-term debt. The official financial program took it for granted, but it was pure voluntarism, the country risk did not go down, difficulties were coming and this would force them to use the disbursements of the “IMF II agreement”, which aimed to “strike” US$ 10,000 million in 2019 to be used to meet the financial obligations of the Treasury in 2020.
The yield curve of Argentine bonds indicated that the market had many doubts about public financing for 2020. Poor the president who won the election. The securities that matured in 2019 yielded 3/4%, while the “Bonar 24”-average of 2/3 years-yielded 12% and the “Discount”, Argentine legislation-average of 5 years-yielded 12.5%. Short-term bonds yielded below 50% against medium- and long-term bonds. This clearly indicated that the market assigned a low probability of default in 2019, thanks to the IMF disbursements, but that the next president could not avoid a debt default in 2020.
There were chances that the new scheme would work, but it was a narrow path, with eventual risks. They did not loosen the ultra-orthodox, reckless, wild monetary policy, and, even so, inflation did not come down. The monetary restriction, due to the collapse of credit, plus a real interest rate of 18%, aggravated the recession, and the risk of a debt restructuring was barely assumed by the FDT. But in our opinion, the data included a possible default on the debt in pesos before the elections. To avoid a catastrophic scenario, it was necessary to continue tightening the people’s belt. In 2019, with a per capita income 11% lower than in 2015, the next government would be under pressure to abandon the ordeal that characterized Macri’s Argentina.
Executive Director of Fundación Esperanza, Graduate Professor UBA and Masters in private universities. Master in International Economic Policy, Doctor in Political Science, author of 6 books.
Source: Ambito
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