A borrowed and melted car

It is often said that politics is “the art of the possible”. But for at least 15 years, in Argentina it has become “the art of passing unresolved problems to the next government.”

Of course, 2023 is no exception; in an aggravated situation, with a government administration that seems to be driving a “borrowed and melted down” car.

Smoking and leaking oil, the goal is no longer to drive to far-off long-awaited destinations, but just to get to the next town and not get stranded in the middle of nowhere. And since the car is borrowed, no matter the state in which it is delivered, it will be the owner who must repair it.

The owner (the Argentine company) will lend the car to another driver (new administration), who will have to repair it, but the cost is always paid by the owner.

Thus, this national sport of leaving the problems to the one who follows has more and more costs, and an increasingly impoverished society.

What will be some of the major unresolved issues that the current administration will leave to the next? Many and important, but one could mention, in the first place, a level of freely available reserves of the Central Bank (BCRA), which are practically non-existent.

Its amount is currently in the order of US$ 1,200 million and we must finish going through a year in which, due to the effects of the drought on agricultural production, there will be around US$ 19 billion less in exports.

The Government has achieved some extra flexibility from the International Monetary Fund (IMF), but it is far from compensating for the consequences of the dwindling dollars due to the drought.

Aware of the urgency of the situation, the Government is now trying to use savings in public securities in dollars from public departments and the National Social Security Administration (ANSES), which yield 45% annually in dollars, to obtain pesos that help to refinance public debt maturities. In this way, it seeks to partially satisfy the demand for dollars so that it has less impact on the prices of the alternative exchange rates. Extremely expensive financing to obtain results of small and uncertain amounts, in addition to the impact that a measure of this nature has on expectations.

Everything indicates that, stubborn in not honoring the official exchange parity, the tourniquet overloaded on imports will increasingly hamper production, which will add to the strong recessive effect caused by lower dollar earnings from agro-industrial exports.

In addition, accrued and unpaid imports would already add up to around US$ 9 billion, a figure that will tend to increase in the coming months and will also put pressure on the non-existent reserves that the next national administration will inherit.

Regarding the official exchange rate, it is 21% below the average of the last 23 years. It is true that it is still 26% above the level at the end of the second government of Cristina Fernández (November 2015).

But the latter was, along with the exchange rate at the end of convertibility (2001) and the Martinez de Hoz exchange rate table (1980), the lowest in the last half century. And in all three cases, a strong devaluation of the peso followed.

Exchange rate and fees

In this regard, a current curiosity is that the real exchange rate is low, without wages in dollars being very high, as usually happens when the local currency is overvalued.

Private formal salaries are located at $220,000, that is, at US$1,240 official or US$570 informal. This compares with official US$1,650 in 2015, when the exchange rate was very low, or US$883 in 2001. In terms of purchasing power of local goods, salaries are 12% below the level that existed in 2017.

If the official exchange rate is low, but wages are not very high in dollars, what explains the exchange rate lag? Among other things, the price of local goods, which are formed from the value of the informal dollar, given the strong clamp on imports.

Of course, state spending that continues to be high in terms of gross domestic product (GDP) also plays a role. The next government will have a great challenge to honest the official exchange rate and rearrange relative prices, when the poverty rate this year will be at least 40% of the population.

Another Greek present for the next national administration will be the level of public service tariffs. For example, electricity rates now cover 48% of the cost of energy, when such coverage was 64% in 2019 and 14% in 2015.

Concomitantly, the cost of economic subsidies was 2.9% of GDP in 2022, while they represented 1.7% in 2019 and 5.2% in 2014. This is the most important variable to deactivate the fiscal deficit in the future.

Of course, there will also once again be a great challenge to face the debts of the public sector and the BCRA. The National Treasury debt currently represents 80% of GDP, with the aggravating circumstance that a high percentage of the debt in national currency adjusts for inflation or the exchange rate; and in some cases, by the greater of both variables.

Thus, the power of liquefying Treasury debt with an honesty of the exchange rate is less and less evident.

The debts can be faced with BCRA reserves, fiscal surplus or with new debt, but here again problems appear for the start of the next administration: there will be no freely available reserves at the end of the year (they will probably be negative).

Nor will there initially be access to the voluntary international credit markets and there will be little margin in the local market: and the primary fiscal deficit, which with the agreement Light with the IMF it should be 1.9% of GDP this year, it will most likely exceed that figure given the drop in exports and economic activity. It is compared against a primary deficit of 0.4% of GDP in 2019 and 3.8% in 2015.

Furthermore, the BCRA’s quasi-fiscal deficit should not be forgotten, which this year aims to be close to 5% of GDP.

It is clear that the car of the current administration will arrive with a blown engine at the end of its journey. New drivers will need to repair it like never before.

It remains to be seen if it will be a repair to travel extensive and difficult territories, or if the vehicle will again be left halfway.

Chief Economist of the Ieral and professor of the UNC