March 10, 2014
When green signals red
Shock devaluation raises inflation alarm
Last Thursday’s shock devaluation is widely viewed as a confirmation of a losing battle against inflation yet somehow the state manages to finish up on top on both fronts.
Take devaluation. If we compare the public and private sectors, business companies have to go looking for credit abroad in dollar terms and pay more to service these debts, as well as meet often highly dollarized costs. By way of contrast, President Cristina Fernández de Kirchner reminded us for the umpteenth time this week in Cuba how debt-free her administration is (as indeed it is, especially if it can avoid blundering into paying some US$3 billion on growth-linked bonds this year after exaggerating economic expansion data) — as for its operating costs, these are largely paid in pesos which can be printed at will.
And inflation? Here Argentina does not have much company — even if double-digit inflation has been on the rise recently with around a quarter of the world’s countries on the way (and a couple of dozen already there), the fingers of one hand probably suffice for the nations with 20 percent-plus inflation (and counting) like Argentina. But how do we know that Argentina is not near the top of an exclusive club which many other countries would like to join?
The European Union and Japan for a start — fighting uphill battles to inject more inflation into their economies and thus recover the competitiveness denied by the euro zone and a historically overvalued yen. In contrast to Argentina, massive levels of indebtedness (often exceeding Gross Domestic Product) are the big problem and inflation is a good way of whittling down these percentages by raising nominal GDP. And not only public debt but industrial liabilities, as Argentina knows full well from the experience of the 2001-2 meltdown (Germany’s 1923 hyperinflation had an even more devastating effect on industrial debt with half a decade of prosperity ensuing — pretty much the experience here too).
The “inflation tax” is notorious for swelling state revenues — with this devaluation the CFK administration can already look forward to millions more pesos from export duties (although the already hefty fuel import bill will also soar). But inflation is a cancer for everybody else — for banks even more than businesses and for the poorest more than anybody.
Prominent among the business casualties of devaluation is YPF — the great hope for the future due to huge potential of the Vaca Muerta shale oil and gas. The highly globalized oil industry has correspondingly dollarized costs but local companies in the sector have to import and sell in pesos — they thus have a problem with devaluation, needing to run harder even to stand still and to up prices even more to raise investment capital in the case of YPF.
Apart from the devaluation itself, interest tends to focus on the newly authorized dollar purchases and on the price impact in general but this column does not intend to probe too deeply into either — largely because it would be far too soon. In the case of the legalized greenback sales, no clear trend emerges from the first couple of days — neither the US$108,000 of the first day (largely due to technical teething troubles for the new system) nor the US$12.6 million of the second (when interest in this new option could be expected to be at its peak). Even the latter figure does not point to a big market and there are tight limits (20 percent of salaries above a monthly 7,200 pesos up to a ceiling of US$2,000) in order to restrict the sales to what the Economy Ministry calls the small saver — which nevertheless excludes over three-quarters of tax-payers and even more pensioners. Due to this modest volume, there is scant chance of this trickle doing much to change the imbalance between dollars and pesos — despite everything the gap between official and parallel exchange rates persists above 50 percent (which might seem an attractive margin for flogging dollars acquired at the official rate on the “blue” market but there seems little or no indication of that occurring).
Equally premature to draw conclusions about prices where the government still seems to be improvising its response on the trot, judging from yesterday afternoon’s press conference by Economy Minister Axel Kicillof and Cabinet chief Jorge Capitanich. Past, present and future price restraint agreements hang very much in the balance but it should be pointed out that even the most successful price freeze would do nothing to correct the total disarray of relative prices — perhaps the real problem. It is very easy to accuse businesses of speculation (or worse), especially where there are few or no imported components, but they cannot sell without knowing at which prices they will have to restock and they are naturally inclined to give themselves the benefit of the doubt — a context which can also provide good cover for profiteering. It’s complicated. But with this month’s inflation estimated at between four and five percent, momentum alone dooms February to at least half that.
Instead of the obvious points of interest, perhaps we should be paying more attention to the provinces, whose police mutinies and subsequent looting made them the main hotspot last month (beyond the literal meaning of hotspot since this city certainly had its fair share or more of December power cuts). Argentina’s provinces are sitting on a dollar-linked debt mountain of some US$11.2 billion at precisely a time when their employees are striving for more index-linked salaries in the face of rising inflation. Precisely because the exchange rate was artificially repressed until now, such bonds had become an increasingly attractive option for cash-strapped governors but Río Negro on Tuesday perhaps presaged the shape of things to come — Cabinet political staff was halved with the salaries of the survivors slashed 15 percent.
Another area which has been given insufficient attention by most economic analysts is the upsurge in interest rates (already crossing the 25 percent barrier) — perhaps the most standard method of them all for taming inflation, not least in neighbouring Brazil (where the highest rates have sometimes coincided with the strongest growth even if this policy aims at cooling down overheated economies).
On one thing almost everybody agrees — an integral plan is needed, not measures in isolation. But if the government is widely suspected of trying to buy time, we will also need more time to see the whole package and the whole picture.