Argentina experiences a history marked by a low growth rate and high volatility;
Recessive years are followed by others of strong economic recovery.
This behavior is the result of the impact of international economic cycles in an economy marked by procyclical policies;
Instead of saving in times of prosperity, and with this saving softening the impact of negative shocks, domestic policies amplify the international cycle, deepening imbalances when the rest of the world finances them at the cost of remaining vulnerable when the winds change.
The cycles of waste and vulnerability led to debt restructurings becoming recurrent, and monetary financing - which tries to "avoid" adjustment - made inflation the main scourge facing the country.
In the last 30 years, Argentina was the sixth country out of 170 nations with the highest accumulated inflation rate, the eighth with the highest depreciation of its currency, and was ranked in the top ten in volatility of its growth rate.
In this context, a new administration took office that proposes combating inflation based on the elimination of the fiscal deficit, and the use of the exchange rate as a nominal anchor.
Although the need for fiscal adjustment does not seem to be under discussion -beyond the “war of attrition” that occurs to settle those who pay for it-, the use of the exchange rate as an anchor for inflation raises doubts, even leading to some to predict a coming devaluation.
Although it is expected that inflation will slow down to the extent that the fiscal adjustment persists and the initial impact of the devaluation and the adjustment of relative prices is diluted, inflation would far outweigh depreciation, which would result in a strong appreciation of the real exchange rate to levels similar to those observed in the last months of the previous government.
Now, is this expected dynamic the harbinger of a new devaluation?
Firstly, although the level of the real exchange rate could be similar to that of pre-devaluation, we could not say that they are the same.
While the strong appreciation observed until November was the result of a significant acceleration in the inflation rate, a future appreciation would be the result of the eventual successful correction of the distorted relative prices resulting from the policies applied by the previous government.
Second, assuming a depreciation rate such as that initially suggested by the BCRA, and a consistent inflation dynamic, at the end of 2024 the real exchange rate would present a level even higher than that registered from mid-2016 to the beginning of 2018.
Thirdly, in Argentina, history shows that depreciations happen sooner rather than later in prices.
The successive scams against peso holders made Argentines use the dollar as a unit of account, proof of which is the poor level of monetization of the economy and the large external savings.
This implies that every time the peso depreciates, all sectors, both tradable and non-tradable, seek to rebuild their income measured in dollars.
The transfer of depreciation to prices occurs at most at the end of the year, depending on the magnitude of the recession that it causes.
Generally, the argument for depreciation is based on the search to improve competitiveness.
Now, if this were valid, Argentina should be one of the most competitive nations in the world given its history.
A devaluation increases the relative price of internationally tradable goods with respect to those that are not, which could have some temporary impact on a company's income statement, until the devaluation passes into prices.
Now, there are many other factors that affect competitiveness and that position Argentina in 2023 in 63rd place in the IMD World Competitiveness Index, out of 64 nations surveyed, only above Venezuela.
Finally, countries that faced sustained growth processes inevitably saw their exchange rates appreciate.
Proof of this are Japan and Germany after the Second World War, we can also cite the cases of Israel, Chile or Mexico, based on their stabilization programs.
When countries begin to correct their imbalances, they experience capital inflow processes, which increase domestic aggregate demand.
When this stimulates investment in the tradable sector, it results in productivity improvements and an increase in real wages for the sector, which ends up putting pressure on nominal wages and prices in the non-tradable sector.
The increase in the relative price of non-tradables leads to exchange rate “lag.”
In the case of Argentina, real appreciation seems inevitable in the short term.
To think that this can be “corrected” through a new devaluation is to ignore that Argentines use the dollar as a unit of account, which makes it impossible for the price change not to occur quickly.
Accelerating depreciation implies accelerating inflation, and the failure of the program the government is attempting.
Now, this limitation that our economy presents demands the rapid implementation of the long-awaited “structural reforms” in search of improving the country's competitiveness by means other than decreeing that the subway is 50 centimeters long to make us feel taller.
Fernando Marengo is an economist. Chief Economist at BlackTORO Global Investments.