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Argentina: Can Massa Tame Inflation?
Five experts on the outlook for Economy Minister Massa’s anti-inflation policies.
BY LATIN AMERICA ADVISOR
Inter-American Dialogue
Argentina’s annual rate of inflation in December hit its highest level in more than three decades as prices nearly doubled from the same month a year earlier, according to official data released Jan. 12. Economy Minister Sergio Massa has said monthly increases in inflation should fall to about 3 percent by April, which would be a decline of two percentage points from the most recent monthly increases. How likely is Massa’s forecast to be realized, and what effect are his policies having on inflation? What are the main forces fueling inflation in Argentina? How is the economy shaping the outlook for Argentina’s presidential election scheduled in October?
Miguel Kiguel, executive director of EconViews in Buenos Aires: Argentina has been the preferred laboratory to study inflation for more than seven decades and has the answers to almost every question you are afraid to ask. Triple-digit rates of inflation in the 1970s and 1980s, hyperinflation in 1989 and 1991, single-digit rates in the 1990s and now, one more time, it is approaching the dreaded 100 percent rate. A few reflections on the current episode, which started during the Néstor and Cristina administration, could help. The main underlying problem is a large fiscal deficit that in contrast to many countries cannot be financed in the bond markets. The recurrent defaults on domestic and foreign debt have closed that venue. One of the lessons of the Argentine inflation process is that expectations matter, and they generate persistence or inertia that complicate stabilization efforts. Anchoring expectations is at the center of the problem and requires a comprehensive program that attacks the imbalances in fundamentals as well as the inertial components. Minister Massa announced that he plans to bring down inflation to three percent per month by April, which given the circumstances sounds like wishful thinking. It is based on a gentlemen’s agreement with firms to cap price increases to 4 percent per month and with labor unions to limit wage hikes to 60 percent per year. But there was no indication of a strong reduction in the fiscal deficit, or of a commitment on the rate of depreciation which remains above 5 percent per month, nor on the utility rates, which need to be adjusted to reduce subsidies and the fiscal deficit. There is one piece of good news, though: it is unlikely that Argentina will suffer runaway inflation this year.
Lisa M. Schineller, managing director and lead analyst for sovereign and international public finance ratings at S&P Global Ratings: The significant uptick in Argentina’s inflation to 95 percent at year-end in 2022, from 51 percent in 2021, largely reflects the economy’s pronounced macroeconomic imbalances and distortions. While the global rise in food and energy prices played a role, local policies that generate excess peso liquidity were the driving factor. Limited political room for policy correction ahead of this year’s elections underpins our expectation of inflation at about 90 percent at year-end. Recourse to policies such as ‘precios justos,’ which froze prices of more than 1,500 consumer goods from November 2022 through December 2023 aren’t sufficient to engineer a meaningful decline in inflation. The somewhat lower fiscal deficit still generates high financing needs vis-à-vis the small bond market; there is limited appetite to hold government paper maturing beyond the election; interest rates are barely positive in real terms despite recent increases by the central bank; and a 100 percent gap between the official and more depreciated parallel exchange rates isn’t expected to meaningfully narrow given policy uncertainties after the election. In addition, we expect wage negotiations to continue to try to recover lost purchasing power, and a phased, gradual reversal in energy subsidies is scheduled to continue under the IMF agreement. Alongside such high inflation, which hurts household purchasing power, we expect a further slowing in the economy. We forecast real GDP growth of less than 1 percent, from about 5 percent in 2022 and a 10 percent Covid-reopening rebound in 2021. While pervasive foreign exchange restrictions on financial transactions have weighed on investment for some time, the tightening of import restrictions in 2022 has led to delays in accessing even key imported inputs and implies a constraint for local activity. Uncertainties surrounding the complex local political climate and global geopolitical and recession risks limit investment. Prospects are brighter for Vaca Muerta production, but drought is weighing on agricultural sector exports.
Todd Martinez, senior director and co-head of the Americas for sovereigns at Fitch Ratings: Inflation surged to 95 percent in 2022 and is likely to remain at this high level or rise further in 2023, rather than fall sharply as the government expects. We project monthly inflation will return to around 6 percent (rather than fall to 3 percent as the government projects) and at year-end will reach 100 percent (rather than 60 percent). Despite a sharp slowdown in economic growth this year (we project just 0.3 percent, with a risk of a recession), price pressures will persist. First, ‘inertia’ is high in Argentina due to backward indexation, meaning that high inflation last year will prompt large increases in wages (and also pensions—linked to wages) this year. This will add to price pressures on the demand side, and on the supply side by lifting production costs. Second, increases in energy prices as part of a subsidy rollback will add pressures. And third, exchange-rate woes will continue fueling inflation. The central bank tightly controls the official exchange rate to contain inflation, but to little effect, as much higher (and rising) parallel exchange rates and the expectations of the eventual devaluation they signal contaminate price-setting behavior. This problem could be aggravated in 2023 by a drought, which will undermine agricultural export receipts and thus the central bank’s foreign exchange-reserve firepower, as well as elections. Election-related policy uncertainty typically fuels financial-market jitters in Argentina and could compound inflation pressures should this complicate the government’s ability to finance itself and force the central bank to step in with support.
Bruno Binetti, nonresident fellow at the Inter-American Dialogue: The Argentine government celebrated the 94.8 percent annual inflation rate of 2022 because it didn’t break the 100 percent threshold, which says a lot about the state of the economy. Inflation has decelerated since its peak last July, but that rested on ad hoc price agreements between the government and businesses that will be hard to sustain, especially as wage negotiations for 2023 begin. The government is also trying to control prices through import restrictions and by resisting a devaluation of the peso. The gap between the official and informal exchange rates exceeds 100 percent, and there are more than 10 alternative exchange rates for specific sectors. These measures can work for a while, but they have very negative implications in the longer term, as Argentina has seen many times before. Minister Sergio Massa has cut public spending, but monetary emission remains high, and the central bank continues to finance the treasury, although now through indirect means. Massa is not hiding his presidential ambitions for 2023, which suggests that he will prioritize economic stimulus over inflation control. To make things worse, high inflation will combine with economic deceleration. The World Bank expects GDP to grow by 2 percent in 2023, down from 5.2 percent in 2022. This paints a daunting picture for the incumbent coalition ahead of the presidential vote, but also an extremely challenging scenario for whoever takes office as president on Dec. 10.
Andrés Asiain, director of the Scalabrini Ortiz Center for Economic and Social Studies in Buenos Aires: Argentina’s inflation rate has a very significant inertial component. That inertia could be gauged at a 5 percent monthly. We think several sectors will hold the inflation rate at around or above 5 percent over the coming months. Energy tariffs will be updated in February and March, and while meat prices were stable for about eight months, last week’s prices went up 30 percent in wholesale markets. Wages in the formal sector will be growing, and several negotiations will take place in March. So despite the high inflation, we don’t expect lower real wages.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
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