November 26, 2014
Must d-words be dirty?
Does a weaker peso only bring bad news?
If after seven long years the government is finally coming to grips with the “i-word” by issuing at least semi-credible inflation figures two months running, why then should it now stumble over the “d-word”? When announcing the February inflation figure (3.4 percent) on Monday, Economy Minister Axel Kicillof could not bring himself to mouth the word “devaluation” in explaining the factors —instead he mumbled about “exchange variations.”
But why should devaluation have to spell bad news? For most other economies a devaluation carries the promise of more exports, a bigger trade surplus and bargain-hunting tourists pouring into the country. On the downside it becomes more difficult for citizens to travel abroad or import the latest rage in cars but this is precisely what the government has been trying to fight for the last year or two — devaluation should therefore serve these purposes far more effectively than currency or import curbs or luxury car taxes.
In the hands of skilled spin doctors, devaluation could thus be turned into an exciting feelgood story so why the evasiveness? Perhaps the government believes its own propaganda after vowing for so many years that there would never be a devaluation under its watch. The resistance to devaluation was also fundamental for the fast-fading “narrative,” since an artificial exchange rate refusing to reflect inflation helped the country to live beyond its means, exaggerating Gross Domestic Product in dollar terms — hence the attitude of greeting the devaluation with consternation as a blow to national pride instead of as a trade opportunity bailing out regional economies.
All over South America the emerging market boom pumped in so much foreign direct investment that it was not unusual to see the local money appreciate by as much as 80 percent in a few years, thus leading to an enormous sense of relief once such a strong currency lost a bit of weight because more jobs could be created in export sectors. Yet no regional heavyweight or middleweight drew less FDI than Argentina in the last decade — currency appreciation here obeyed other causes.
Perhaps the real problem with the “d-word” is the persistence of the “i-word.” A devaluation elsewhere tends to be a sacrifice to make the economy more competitive and therefore a government going down that road will normally follow up that advantage for all it is worth. But in Argentina’s case the inflation from the first two months of the year whittles away much of the competitive gain, perhaps even halving it — the latter has to be balanced against devaluation accelerating the momentum of inflation. Furthermore, most people are going to notice rising prices far more acutely than improved labour unit costs. Already there are signs of the Central Bank reverting to the old policy of surreptitious mini-devaluations instead of overt major devaluation, despite the success in weathering its impact in recent weeks.
One major downside of devaluation is that not only the swank cars become more expensive to import — those massive fuel import bills
threaten to become a few billion dollars more so that a devaluation accelerates the need to bite the bullet on slashing the transport and utility rate subsidies. Even if the government has taken its time admitting it, it does not seem to have conceptual difficulties in recognizing that these subsidies are more futility than utility — centring consumer-led growth on largely power-driven durables and then subsidizing the electricity for them was always a recipe for disaster or at least a whopping energy deficit. The Cristina Fernández de Kirchner administration’s problems seem to lie more in the political will and administrative expertise — remember how her 2011 landslide gave her the electoral margin to start “fine-tuning” the subsidies out of existence, only to crash with the Once railway disaster whose trial has just started.
And what about Monday’s announcement of the February inflation figure other than revealing that devaluation seems to have replaced inflation as the economic team’s main object of denial? The most immediate reaction came the same day from the stock market and it was negative — investors had been expecting February’s inflation to be slightly higher than January’s, not slightly lower, so they started fearing for index-linked bonds which fell two or three percent, thus neutralizing the upward momentum from Friday’s announcement that negotiations with Paris Club creditors would finally start in late May.
Yet other analysts subsequently had less doubts about the credibility of the February inflation figure. Expectations of a higher figure were largely based on the maxi-devaluation having been sprung late in January so that its full effects were more likely last month. But the Central Bank’s counter-offensive — jacking up interest rates and forcing the banks to shed greenbacks by imposing ceilings on dollar holdings and futures — was considerably more drastic than the devaluation itself, thus making a lower inflation figure more plausible. Because of this action, March’s cost of living should be lower in principle but the February wholesale inflation figure of 5.1 percent creates dangerous momentum.
And whatever the doubts about INDEC statistics bureau’s new nationwide index, Kicillof was right to question the professionalism of the independent consultants with their sharply differing results and nebulous criteria. But Kicillof never carries this critique one step further to ask how such dodgy data could ever have gained credence because he doubtless knows the answer — INDEC’s inflation data between early 2007 and late 2013 were such a travesty of statistics that the inadequate but honest efforts of independent sources earned far more trust as being much closer to perceived reality.
And while Kicillof questions the transparency of the private consultants, the accountability of his new index leaves much to be desired. Not only is INDEC coy about the prices on which its figure is based but the claim to be nationwide comes from compiling the data from the six regions into which the country is divided and yet we never see any of these regional statistics. Last but not least, the new index drops the basic shopping-basket, from which poverty and destitution levels were estimated — it should never be forgotten that not only did INDEC’s old fictions exaggerate GDP expansion by confusing nominal with real growth but it also made any real poverty figures impossible.