November 23, 2014
My word is my bond...
...but growth rate calculations are another matter
One of the problems with devaluation is that the notion can be so easily devalued. Unfortunately timed for the eve of the collective bargaining season, the collateral damage becomes even more unacceptable when devaluation seems to fail in what is usually its main selling-point — namely, a substantial improvement of the trade surplus via more competitive exports.
Instead last Thursday’s trade figures seemed to indicate the very opposite. The first month after devaluation saw February’s trade surplus plunge 94 percent to a mere 44 million dollars after exports fell seven percent while imports rose one percent. The export picture is expected to change between summer and autumn — when the main harvest crop for sale abroad will switch from a heavily discouraged wheat to a fervently encouraged soy — but these figures serve to remind us that imports are always the downside of devaluation and here Argentina’s trends are not looking good. Until Vaca Muerta becomes a live cash cow, the fuel bill from Argentina’s chronic energy deficit can only grow with a weaker peso. Furthermore, the combination of a mushrooming fuel bill and shrinking Central Bank reserves crowds out the import of inputs for manufacturing industry, thus hitting the export of industrial goods.
For this and other reasons the government seems to be retreating from eight-peso convertibility after a couple of months and reverting to last year’s creeping devaluation in order to avoid any repetition of last January’s shock. In those two months exchange rate stability was achieved by a combination of forcing banks to release their greenbacks above a certain percentage of assets and futures, import restrictions and some success in netting grain export dollars (170 million dollars last week alone) yet all this was not enough to prevent Central Bank reserves from slipping by over 400 million dollars so far in March to just above 27 billion.
All of which adds interest to INDEC statistics bureau’s growth rate for the last quarter of 2013, whose announcement is expected today — and perhaps a new method of calculating growth to join the nationwide inflation index introduced last month. Because the payment of last year’s growth-linked bonds stands to deplete reserves by a further 3.6 billion dollars or over 13 percent of current levels (a sum which could more than double the current universal child benefits totalling 17.5 billion pesos). As has been explained more than once in this column, INDEC’s inflation denial over seven years enabled most nominal growth to be passed off as real growth and last year’s figure is a case in point — the first three quarters of 2013 saw 5.7 percent growth according to INDEC and even with the slowdown during the final quarter (also admitted by INDEC with seven straight months of industrial decline since last July), today’s total should be close to five percent, well above the 3.22 percent required to trigger payments on the growth-linked bonds.
So the Cristina Fernández de Kirchner administration seems trapped by its own propaganda but on Tuesday opposition deputies (who for the last 23 months have been issuing the so-called “Congress index” of inflation based on averaging out independent estimates as a corrective to INDEC’s undershooting) calculated last year’s real growth at 2.9 percent on the basis of their inflation data, thus adding to the question-marks as to whether the 2013 growth-linked bonds will finally be redeemed. Since the government is in the process of statistical correction, it would be entirely logical and consistent to extend these changes to the growth rate and save its ailing reserves a few billion — after all, did not Ronald Reagan make himself one of the most popular United States presidents by saying: “Just kidding, folks” a lot?
Yet coming clean in this way by welshing on the bond would be another nail in the coffin of Argentina’s credibility.
Evidently the money markets are not expecting any sharp practice because bond markets in particular rose solidly on the same day the opposition hurled down its challenge to the growth-linked bond. But then the government would not need to default directly — with every goodwill towards creditors, they could also accept the opposition objections with immensely democratic patience, perhaps relying on the infinite lentitude of the Argentine legal system to spin payments out yet further. Nor does it seem right to suffer this wholly needless loss of hard money purely on the basis of false pride (and figures) but if the opposition ever came to be seen as the problem in honouring bonds, then overseas investors could start losing their interest in post-2015 Argentina as well.
“Oh what a tangled web we weave/When first we practise to deceive!” as Sir Walter Scott wrote over 200 years ago.
Both the growth-linked bond and the trade figures have been attracting their fair share of attention but this column would like to conclude by highlighting one development which has gone largely unnoticed — the decline of small and medium-sized companies (PyMEs) as Argentina’s great employment reservoir. Traditionally, the labour-intensive PYMEs have accounted for three jobs out of every five while producing less than half of national output but now the latest Labour Ministry figures show the PyMEs as employing 46 percent of Argentina’s workforce of 8.8 million while accounting for 45 percent of national turnover according to the Industry Ministry. All three Kirchnerite presidencies have prided themselves on maintaining employment levels while scorning productivity gains and the economies of scale but the concrete bedrock of this achievement was always the labour-intensive PyMe. Not any more, it seems, and that spells trouble with jobs coming under threat as the economy slows down.
Various factors account for the declining generosity of the PyMEs as employers with more probably to come as the doubled interest rates dry up credit in the next few months. We tend to think of the big international players as most dependent on the exchange markets but the currency restrictions of the last couple of years seem to have been hardest for the smaller companies. There is also a structural change — PyMEs used to be ancillary firms for the big assembly lines (on the Italian model) but their industrial brethren have stood still for the last four years, being replaced by the less labour-intensive services. But whatever the causes, a problem..