November 21, 2014
Swings and roundabouts
Nothing is written in stone for the next 20 months. No matter which indicator might be your favourite touchstone — inflation, the “blue” dollar, Central Bank reserves, interest rates, etc. — what goes up can come down (or vice versa) according to the vagaries of policy and the economic cycle. Comparisons with a yoyo might be exaggerated but linear trends will be few and far between.
Even those sceptical of Tuesday’s announcement of a 2.6 percent inflation rate for March and cleaving to the Congress composite average of 3.3 percent would have to concede deceleration since January weighed in at 3.7 percent and February at 3.4 percent. And skepticism might not be justified, not because of the infallibility of either INDEC or government policy but due to the numerous indications of recessive tendencies to limit prices rises (shades of 2009).
Indeed the “Price Watch” programmes and all the rest of it are almost superfluous because economic slowdown and high interest rates tame inflation far more effectively. Economy Minister Axel Kicillof and Trade Secretary Augusto Costa have negotiated diluted price increases when some of the bleaker readings of the economic scenario might warrant drastic reductions. Indeed pressuring the supermarkets (and nobody else) into price controls has probably done them a favour by forcing them to be more competitive — something which might not otherwise have occurred to them amid Argentina’s business culture. For almost the first time ever the Chinese supermarkets, whose growth in the last decade in particular has been exponential as a result of undercutting competitors, have been wrongfooted — some of them started entering into agreement with the price authorities this week.
Yet there is nothing irreversible about slowing inflation any more than the policies which made it possible. As winter approaches and the days become more chilly, the government might well start having cold feet about recession and abruptly reverse gears — after all, how many times were we told in the past that a “little bit” of inflation was better than no growth as if the former were the price of the latter? In these next 20 months we are likely to see a lot of stop-go policy-making according to whether recession or inflation is perceived as the worse evil.
For months the rise of the “blue” dollar and the decline of Central Bank reserves have been looking like one-way streets but suddenly neither of these trends is looking so inexorable either. From struggling not to sink below US$27 billion, Central Bank reserves were something around US$27.8 billion yesterday on the eve of the long Easter weekend — also a factor because the April glut of public holidays (with last Thursday’s general strike adding yet another day off) has made this season almost like the start of summer when demand for pesos to pay local vacations and Christmas bonuses competes with the chronic craving for greenbacks. These holidays also team up with the recessive tendencies to reduce factory activity and hence the soaring fuel import bill, one of the biggest drains on dollar reserves. Nor have there been major debt service payments in recent days.
Yet there is nothing irreversible about recovering reserves either. Quite apart from ongoing debt service, what happens to reserve levels (for example) should the government negotiate a Paris Club settlement as from next month but find that something more than the miserly $US250 million it has proposed is needed as a down payment? And while the Treasury continues to treat the Central Bank as its own ATM, reserves are going to stay under threat.
Meanwhile this economic team sees debt as the solution rather than the problem — a win-win situation because at this advanced stage of the Cristina Fernández de Kirchner administration there would be only time to spend the money, not to repay it (a headache for somebody else). This vision perhaps accounts for the stoic patience being shown with pragmatic and orthodox policies which are both unpopular and in many ways negative in the short term — all seen as the price of a big loan.
Interest rates have not been one-way traffic this year either. After being doubled almost immediately in the wake of the January devaluation, they have been pegged back a point or too in this abbreviated financial week — to the degree that dread of a recession grows, this trend could intensify.
On the basis of recent experience no crisis is complete without rural discontent. The current difficulties still fall short of a crisis because they retain the potential for a soft landing and the agricultural leg is still missing. But this could change on the basis of a Supreme Court decision ruling export duties in the fisheries sector unconstitutional.
While international news agencies almost invariably translate “retenciones” as “export taxes”, this newspaper (and especially this columnist) prefers to call them “export duties” and the difference is substantial, not semantic — and basic to understanding Tuesday’s Supreme Court decision. With the single exception of the famous 2008 sliding scale (approved by the Lower House and defeated in the Senate), the “retentions” have always been imposed by decree or resolution, which would be wholly contrary to “no taxation without representation” principles were they to be defined as taxes — by considering them to be Customs duties on exports, the government could justify unilateral administrative regulation. Yet the Supreme Court decision treated them as a tax lacking parliamentary approval and hence unconstitutional.
If the farming sector jumps onto this (and there are already rumblings), they could use it as a precedent to reclaim the US$74 billion paid in grain export duties since they were re-introduced in 2002 — a sum almost treble the current Central Bank reserves.
Last and probably least, Kicillof’s visit to Washington which merely confuses — a flurry of retroactive grandstanding against the International Monetary Fund which makes one wonder why he bothered to go but in fact he went looking for the IMF, not the other way around, and his rhetorical rejection of the IMF stands in inverse proportion to his acceptance of its recommendations in his policies.