November 23, 2014
Fasten your seatbelt
Even if the landing is soft the ride will be choppy
This newspaper has been following Argentina’s inflation saga consistently from almost every possible angle. And on Thursday it was on to something when its front page story on the new consumer price index said, “members of the audience at the Economy Ministry press conference audibly gasped at the number that was almost four times the rate the government has been releasing for almost every month for seven years in its widely discredited price index.” The “number” was January’s inflation rate according to the brand new nationwide price index known as IPCNu: 3.7 percent. Gasp — and gasp again. Ouch, even express feeling some pain. A monthly inflation rate of 3.7 percent? Some countries have annual inflation rates that are lower than that. Opposition economists quickly declared that at this rate Argentina is looking at an annual inflation of 55 percent. Ouch, that hurt.
The state-run statistics bureau INDEC suffered drastic changes when Néstor Kirchner (President Cristina Fernández de Kirchner’s late husband and predecessor) ordered its take over in 2007. Kirchner was irked by the acceleration of inflation, especially because Argentina had to service index-linked debt bonds. Critics have since repeatedly accused the Kirchner administrations of being in denial about inflation, and lying about it.
That explains the gasping on Thursday in the corridors of the nation’s economic power. Opposition lawmakers in Congress had estimated January’s inflation rate at 4.6 percent. INDEC had almost consistently reported monthly inflation rates of under one percent a month. But suddenly in January, the month in which the peso lost 18 percent of its value against the dollar, the official inflation rate did not look that different from what was estimated by the private economists.
Economy Minister Axel Kicillof did much of the talking on Thursday. But he was flanked at the Economy Ministry press conference by INDEC’s two top officials (Ana María Edwin and Norberto Itzkovich). Those two officials, along with the former Domestic Trade secretary Guillermo Moreno, had orchestrated the inflation rate, which was disapproved by the opposition and the International Monetary Fund (IMF).
The IPCNu, which monitors prices in urban areas nationwide almost on a daily basis according to INDEC, has the blessing of the IMF. An IMF official said on Thursday that the fund was aware of the announcement and that it will soon “examine” its consequences.
Kicillof on Thursday declared that the private estimates trumpeted by the opposition lawmakers were rubbish and that only the new official inflation rate is credible. Yet the challenge for Kicillof and the IPCNu is to sustain its credibility.
A new price index was needed, Kicillof said, because Argentina’s economy has changed substantially due to growth since 2003. The critics will insist that the Kirchnerite officials do not have the authority to announce a new inflation rate because they are practically the same officials who were in denial about price increases and did not hesitate to cook the books.
Yet that still does not wipe off the face of the earth the fact that Kicillof on Thursday announced the highest monthly inflation rate in 12 years. The unveiling of IPCNu is the latest in a series of manoeuvres by Kicillof (along with Cabinet Chief Jorge Capitanich and Central Bank head Juan Carlos Fábrega) to attempt a soft landing.
Soft? What is soft about the peso’s drastic devaluation in January? Well compare that to the hyperinflation crisis of 1989 and the financial meltdown of 2001 and anything other than a major crash feels soft.
At the end of last year the dollar exchange controls were tight, inflation was underreported, and the Central Bank’s foreign currency reserves were dwindling. But since then the exchange clamp has been relaxed, inflation is now officially very high and the Central Bank has stopped losing reserves in the past week. Last week, the Central Bank limited the net foreign currency positions of local banks, injecting more dollars into the market.
This column seven day ago quoted the economist Miguel Bein, who has worked for Radical Party administrations, declaring that an orchestrated bank run against the government was effectively over.
Interesting. But Bein’s name has now been turned into a trending topic of huge proportions because on Wednesday Fernández de Kirchner quoted his comments about the nasty bank run designed to topple her administration. The whiff of a “market coup” was in the air according to the president (and Bein, if he was quoted correctly).
Bein is interesting because he is regarded as a highly respected neutral economist (although he is now dishing out advise to Buenos Aires Governor Daniel Scioli, a moderate Kirchnerite who has said that he will run for president next year). He is also interesting because, unlike most critics, he has dared to speculate that there is still a chance that the CFK administration could get its recipe right and indeed make that unlikely soft landing.
It’s no surprise then that the president chose to extensively quote Bein’s comments during her speech on Wednesday, which was carried live by all television channels on a national broadcast. “They have to understand that blowing up a government means blowing up Argentina, jobs and hope,” Fernández de Kirchner said.
By “blowing up” the president (and Bein presumably) means what happened to then-president Raúl Alfonsín during the hyperinflation crisis of 1989 (he was forced to hand over power before the formal end of his mandate) and to then-president Fernando de la Rúa during the meltdown of 2001 (he resigned).
The problems faced by the CFK administration are all too clear. But by Argentine standards the nation has not crashed just yet.
Fernández de Kirchner was forced to bury any dreams of reforming the Constitution to seek a third consecutive term in office when the ruling Victory Front coalition was defeated in all the major districts in last year’s midterm elections. But Fernández de Kirchner’s aim is now to protect her reputation.
Alfonsín’s political reputation was severely damaged by the abrupt end to his term in office in 1989 and De la Rúa’s political career was shattered by the crisis in 2001.
Ultimately what is at stake is what kind of a political reputation Fernández de Kirchner will be left with when her mandate ends next year. Talk has been rife, especially when the black market dollar looked out of control, about forcing the CFK administration into calling snap presidential elections. Yet effectively the mother of all battles for the Kirchnerites is for the president to see out her mandate fully and in one political piece.
The bank run has been declared over by a neutral economist. But more “bank runs” could follow.
Kicillof’s team has admitted that inflation is rampant and has blamed the supermarket chains for the crippling hikes. But now that same team must control inflation in a year that will be dominated by wage demands by trade unions, including a group of powerful bosses (like the teamster Hugo Moyano) who now fiercely oppose the government.
Kicillof’s team on Friday announced that supermarket chains had been fined a total of 3.5 million pesos for failing to meet the conditions of a “price watch” agreement. The economy minister sounded a trifle anxious and exasperated when he criticized the wage demands of trade unions and asked for “time” to open salary talks. Kicillof hopes that inflation can be controlled soon, but opposition economists now expect “stagflation” or a recession.
The salary talks will not be neat. Teachers’ unions are demanding a hefty hike (the equivalent of a 61 percent increase) and it’s very likely that they will call a strike before the school year even starts. Denying a pay hike to teachers and having to face a strike will not make CFK more popular. Salaries this year can be expected to trail inflation, arguably for the first time since Kirchner rose to power in 2003. Belt-tightening measures could also include doing away with utility tariff subsidies. Public transport fares were increased 66 percent last month.
Gasp. It’s not easy to guess how the government will get away with all that. But the question posed by the neutral economist is still interesting. What if Kicillof’s team gets it right? What if the landing is soft and Kirchnerism is not crushed? In any case, there’s no escaping the belt tightening. When the pilot announces it is time to land you have no choice but to fasten your seatbelt.