Inflation, debt and collapse of the peso: the Argentine economy is once again on the precipice

Argentina's economy is not doing well.

Until just a month ago, the OECD forecast GDP growth of 3.6% for the South American country, the second highest in Latin America behind Colombia (6.1%).

Faith was placed in the remedial effect of the agreement signed last January with the IMF, which rescheduled the payments of a debt of 44,000 million dollars.

But everything has changed.

Burdened with old unresolved structural problems, and cornered by the global effects of the war in Ukraine, the pressure cooker has exploded.

The debacle began on July 2, when Martín Guzmán, guarantor of the agreement with the IMF, presented his resignation as Minister of Economy.

Since then, everything has gone downhill.

The Argentine peso has lost 41% of its value against the dollar in the informal and financial markets,

Inflation forecasts for 2022 are at 90% and debt bonds are trading at 18% of their starting value, in the default zone.

Confidence in the government of Peronist Alberto Fernández is rock bottom.

The macroeconomic picture is very alarming, while political instability is growing.

The palace fight between Fernández and his vice president, Cristina Fernández de Kirchner, which ended with the departure of Guzmán, keeps the government paralyzed.

The arrival at Economy of Silvina Batakis, a technique recognized by academics but without her own political weight, did not prevent the storm.

Only in the last week, the value of the dollar went from 291 to 337 pesos in the parallel or blue market (without state intervention).

The gap between the 136 pesos quoted from the official dollar, which only applies to foreign trade, and the blue (listed on the informal market) is around 160%, which fuels expectations of a devaluation.

Argentines flee the peso and take refuge in the dollar without the Executive being able to prevent it.

Defensive strategies have been activated in the face of a terminal crisis, one of those that Argentines already know well.

The last one, in 2001, with the playpen.

Meanwhile, the Casa Rosada applies all kinds of foreign exchange turnstiles to stop the bleeding of the Central Bank's reserves.

Since his arrival in office, Batakis limited the access of dollars to importers and made the so-called "tourist dollar" more expensive with new taxes, which is the exchange rate that is applied to consumption abroad with a credit card.

He also promised to honor the fiscal adjustment signed with the IMF, the same one that rejected Kirchnerism and cost Guzmán his job.

It was not enough to regain confidence.

Deficit

"Things are bad," sums up Gabriel Zelpo, an economist at the Catholic University of Chile.

“Until now, the Argentine government handled the situation by placing debt in the local market in pesos.

But there was so much deficit and so much monetary issue that the quota ran out.

He can no longer issue more debt or pesos, because the market told him 'ready, we're done here', he explains.

In June alone, the BCRA injected 1.2 trillion pesos into the market and, in an effort to contain inflation, sterilized 90% of that figure by selling Liquidity Letters or Leliq to banks with an interest rate of 52%. .

"Since the deficit is large, the emission is large," says Diana Mondino, an economist at CEMA.

“In the Central Bank they know that this issue is inflationary and therefore they reabsorb it with the Leliq.

He goes into debt to receive the pesos he just issued, ”she explains.

Argentina committed to the IMF to achieve fiscal balance in 2024, a goal that seems increasingly distant.

In May, the primary fiscal deficit, before the payment of debt interest, was 162,000 million pesos (1,200 million dollars at the official exchange rate).

According to the latest report from the Ministry of Economy, as a result of the impact of the war on food and energy prices, the primary spending of the public sector for January-May “presented a rise [increase] of 78.2% compared to the same period of the last year".

Energy is the great heel of Argentina.

This year, the State will allocate up to 20,000 million dollars, equivalent to 3% of GDP, to subsidize gas and electricity generating companies to keep household bills frozen.

The mother of all battles, analysts agree, is that chronic fiscal red.

Health and education at all levels are free in Argentina.

At the same time, the State spends huge amounts of money on social plans that mitigate the effects of poverty, today at 37.3%.

But income is never enough.

"Argentina has a compulsion for the fiscal deficit, because the Government believes that to govern is to spend, no matter the origin of the funds, the destination or the efficiency of the expense," says Mondino.

The Fernández government is now clinging to the fact that there are still, according to calculations by the Central Bank, between 13,000 and 18,000 million unpaid export soybeans.

And they trust that everything will be better from September, when the arrival of spring heat reduces gas consumption.

But resolving the underlying issue is more complex, warns Néstor Castañeda, professor at the Institute of the Americas at University College London (UCL), because it requires major political agreements.

“It is always easier to sell an alternative project when it is in crisis.

This is very Argentine, there are no state policies because every four years [with the presidential elections] the opposition pushes the country towards the abyss.

The problem now is that the rupture is not so much between the opposition and the Peronist government, but within Peronism itself”, die Castañeda.

The fight over the economic course has dynamited the relationship between Alberto Fernández and his vice president, Cristina Kirchner.

The debacle that followed Guzmán's departure forced the couple into a political truce,

in which Kirchner at least does not publicly humiliate the president or criticize the government's measures.

The big question is whether it will not be too late.