Hyperinflation threatens Argentina – 03/29/2023 – Market

“Exchange, exchange.” “Dollar, euro, real.” “Exchange, exchange.”

All along Florida Street, a famous shopping mall in downtown Buenos Aires, dozens of money changers attract tourists and Argentines to exchange foreign currencies at the “blue” rate, a reference for the parallel exchange rate in Argentina.

There are more than 20 money changers in each of the street’s ten blocks. Customers are shown the daily rate on their cell phone’s calculator and taken to flower or other product stalls, some just outside the so-called “cuevas”, where machines run non-stop counting money.

The “cuevas” in Florida and other corners of the city have to store piles of bills. The largest in circulation in Argentina is the orange 1,000 peso note. Changing US$100, you leave with 39 bills of 1,000 pesos, twice as much as a year ago. With R$100, you have almost 7,500 pesos.

The value doesn’t last long. As the Argentines say, with annual inflation in triple digits, spending fast is the best way to “save” pesos that “burn in the hand”.

Last year, private consumption in Argentina increased by 9.4% compared to 2021 —sustaining a GDP (Gross Domestic Product) growth of 5.2%. In the hotel and restaurant sector, driven by tourists surfing the favorable exchange rate, the jump was 35%.

In this environment, disregarding the appeals of money changers, some closed or decaying stores and many homeless people in the streets of the city, one has the feeling of a vibrant Buenos Aires, with people consuming and having fun in cafes and restaurants, in the center and areas like Recoleta and Palermo.

But, like the attractive facades of the “cuevas” in Florida, this effervescent surface hides a rapid economic deterioration underway in this presidential election year, which has led the government to take unorthodox and extreme measures – without attacking structural problems that bind the economy for decades.

“The short-term question is whether the bomb explodes before the elections, in October, or the change of government, in December”, says Miguel Broda, one of the most respected Argentine economists.

In March, Argentina completed 40 uninterrupted years under democratic rule, the longest period in history. In that time, it has gone through nine major crises, some lasting for years, and today it still has the same GDP per capita as it did 40 years ago. On average, the country grew only 1% per year in the period.

What is fundamental is the fact that, in more than a century, Argentina has closed its public accounts in the black on only ten occasions.

In recent years, without credibility in the market to finance itself only by selling government bonds, the country simply started to print pesos. To the point of needing to hire mints in Brazil and Spain and lead banks to expand banknote storage areas and acquire new safes.

Now, with a sharp crisis looming, of accelerating superinflation, the government of Alberto Fernández and Cristina Kirchner is reluctant to adopt unpopular and urgent measures.

Although Fernández seems out of the question, Cristina may want to run for president and challenge the chances of current finance minister Sergio Massa, from the Frente de Todos, the coalition that has governed Argentina since 2019.

On the opposing side of the liberal right there is the current mayor of Buenos Aires, Horacio Larreta, and Patricia Bullrich, former Minister of Security, both from Juntos por el Cambio. On the radical right, deputy Javier Milei.

Until October, when the election takes place, there is a risk that inflation, and public accounts, will enter a new cycle of deterioration.

In the last 12 months up to February, prices rose 102.5%, the highest rate since 1991. Added to that the worst drought in the country in 60 years, which should reduce exports of the 2022-2022 crop by up to US$ 25 billion. 2023, a drop of 48% compared to the previous cycle.

“It’s a loss that will make the entire economy suffer, because agriculture is what generates the most dollars. There will be bleeding in several sectors and in public accounts”, says Nicolás Pino, president of the Argentine Rural Society.

Some consultancies predict a 3% drop in GDP this year, and official data for the last quarter of 2022 show a slowdown of -1.5% compared to the previous quarter.

With fewer dollars coming in, pressure on the exchange rate and inflation increases, in a country where economists estimate that international reserves are negative.

This strangles the government’s ability to finance social policies in a minimally sustainable way to mitigate the current crisis, and which consume a large part of the Budget.

Last week, the government took two joint heterodox measures to try to alleviate pressures on inflation and cash.

On the one hand, it ordered state-owned companies to sell or exchange bonds in dollars for new papers denominated in pesos, injecting around US$ 4 billion into Central Bank reserves, which heavily intervened in the exchange rate to try to contain inflation. On the other hand, it printed another 130 billion pesos to honor payments, mainly for social benefits.

According to data from the Social Debt Observatory of the Catholic University of Argentina (UCA) and Indec (the Argentine IBGE), 43.1% of Argentines (19.8 million) are below the poverty line, which leads the country to subsidies for families, from electricity and gas bills to cash transfers that, directly or indirectly (via tax deductions), reach 95% of children and young people under 17 years of age.

To finance these policies, the Argentine government’s taxation on agricultural production (the largest source of dollars) is among the highest in the world, and there is a tax on exports at rates of up to 35%.

Other productive sectors have also been taxed more to finance poverty alleviation, but without changes to rationalize the complex network of subsidies and the State.

According to Gala Díaz Langou, executive director of Cippec, a non-partisan public policy center in Buenos Aires, subsidies in 2022, mainly for energy, accounted for 82% of the fiscal deficit.

“Last year, the State paid 79% of the cost of electricity and 71% of gas to all those connected to the network. Many are in the most favored strata, which means that we pay for the air conditioning of the swimming pools of the rich”, he says.

State subsidies in energy and transport (gasoline costs less than half the Brazilian price, at the parallel exchange rate) consume almost twice as much health expenditures and almost a third more than education.

They increased from 2001 onwards, when the peso underwent a major devaluation at the end of a period of currency parity with the dollar, leading to the “corralito” (confiscation) of bank deposits. At the time, half of Argentines fell into poverty.

During the Macri government, some tariffs reduced subsidies, but they returned in the Fernández and Cristina governments, with the pandemic and the War in Ukraine.

After reaching 2.4% of GDP in 2022, the primary deficit (not counting public debt interest) forecast for 2023 is 1.9%, according to an agreement with the International Monetary Fund, creditor of US$ 44.5 billion. But with the historic drought and the ongoing slowdown, the goal seems impossible.

Even a plan to subsidize the energy of the highest earners less would solve only part of the deficit, as there are other fundamental issues.

In the last ten years, civil servants in the three spheres of government increased from 2.7 million to 3.4 million (17.4 percentage points above the population increase), according to the Argentine Institute of Fiscal Analysis. The country has 50% more servers in relation to its population than Brazil.

In addition to energy subsidies, other social programs represent more than 10% of the budget and, according to the UCA observatory, reach 45% of the population.

Finally, the Argentine social security system is highly deficit, with the majority (55%) of the 9 million retirees having not contributed, according to Idesa (Argentine Social Development Institute). Only 23% of the benefits were granted with all contributions.

For many years, thousands of special pensions were also approved, which pay more and contemplated from military and Olympic medalists to singers from the Colón Theater.

With the elections approaching, there is practically no discussion on these difficult issues among potential candidates. But Buenos Aires remains vibrant.