Late response from the Argentine Government to restore calm

Late response from the Argentine Government to restore calm

After two turbulent weeks on the financial level both locally and internationally, the government’s economic team (from Argentina) launched a series of measures with the aim of restoring calm. But unfortunately these answers are late, once the dollar has already risen more than 10% in less than ten days, sovereign bonds sank to parities of 25%, country risk climbed to 2,125 basis points, and they fled from the Common Investment Funds of fixed income in local currency about 237,700 million pesos.

One of the main measures taken was the signing of the decree to update the 2022 budget, the one that was rejected in December of last year. In it, the objective of a 2.5% primary fiscal deficit by the end of the year is reaffirmed, maintaining what was already being worked on in line with the agreement signed with the IMF.

However, the analysis of the dynamics that spending has been taking in the first months of the year, as well as its expected evolution, compared with the observed and projected growth of economic activity, makes it clear that meeting such a goal will be the least challenging.

The accumulated deficit for the first quarter increased almost 3.5 times compared to the same period of the previous year, and primary spending has been increasing for seven months at a rate much higher than inflation. Combined with economic growth, which is already showing signs of slowing down and will be barely close to 3% this year. It is difficult to improve the mark of 2021, when the fiscal deficit reached 3% of GDP.

On the energy side, a long-awaited and long-awaited measure was unveiled: the proposed reduction in subsidies can bring considerable fiscal relief, given that this concept involved, together with transport subsidies, 14% of primary spending on first four months of the year. Likewise, it is difficult to estimate the impact that this measure will have on state coffers, given the vague and scant information released to date. It is not known for sure on which users the reduction in state assistance will fall, although it is known that approximately 90% of people will not receive major increases in their rates in the remainder of the year beyond those who suffered until month of June.

At the monetary level, the Central Bank decided to increase the monetary policy rate by 300 basis points in a new delayed reaction forced by the context and the market, which after the events of last week left little room for maneuver to the monetary authorities. Given this adjustment, the Leliqs rate is currently at an effective annual rate of 66%, and would easily fall into negative territory in real terms if inflation does not fall below 4.5% per month on average, something difficult to achieve at the moment.

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Additionally, the actions of the monetary authority also moved towards private rates, imposing a floor of 53% annual nominal for 30-day fixed terms and for a maximum of 10 million pesos, and 50% for the rest. Once again, this rise, as well as those that took place earlier in the year, have had little effectiveness in boosting savings in pesos, since this is driven almost exclusively by instruments linked to inflation.

On the side of the Ministry of Economy, this week it managed to go through the first test with a view to rebuilding the local debt market, after the stress suffered ten days ago. As expected, this restructuring was costly and reflects that the market still has doubts. The BCRA had to assist the treasury with purchases in the secondary market in the days prior to the auction on June 14, to reduce the yield on the bonds, and Guzmán had to raise the rates offered, as in the case of Ledes, which climbed more than two percentage points, or the CER bonds that returned to the positive plane offering returns of between 2% and 3% per year over inflation. However, this round only implied maturities for 11,000 million pesos, while the real challenge will be at the end of June, when the Treasury will have to refinance approximately 600,000 million pesos.

Obviously, the measures have little chance of success from the moment they come to light, not only because they fail to anticipate imbalances and are simply responses out of time, but also because they are affected by a context of low credibility, with expectations that evolve unfavorably as the weaknesses of the macroeconomic scenario are confirmed.

All these issues and others related to the local and international situation will be discussed in the new edition of Expo EFI, an event on economics and finance. The event will take place online between June 27 and 30, with a special face-to-face meeting in Mendoza on Wednesday 29.

About the Author: Esteban Domecq is a Master in Economics and Finance, and president of Invecq Economic Consulting, which organizes Expo EFI 2022.

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