The worrying inflation forecast launched by an economist / Argentina News

To analyze high inflation and the lack of dollars, iProfesional interviewed Claudio Caprarulo, Principal Economist at Analytica Consultores

By Mariano Jaimovich

06/03/2023 – 08:21 a.m.

The economy and politics are in a moment of tension, due to the high inflation levels, the lack of dollars in the reserves and the uncertainty due to the presidential elections. Within this delicate framework, iProfessional spoke with Claudio CapraruloPrincipal Economist at Analytica Consultores.

In his opinion, if the government does not gain credibility in these months, “we can see another jump in inflation and reach double digits a month.”

Regarding the economic crisis, he considers that the Casa Rosada had a rapid diagnosis of the crisis of the lack of foreign currency due to the severe drought, but “Solutions haven’t arrived yet.”

Regarding the immediate future, he maintains that “We all know that there is going to be a change in the macroeconomic regime starting in December, but no one is quite clear about which one we are going towards.”

-What reading do you make of the current economic situation and the reaction of the Government to face it?

-When months ago we analyzed the drought and its impacts, we discounted a scenario of greater fragility as a result of the lack of dollars and the increase in inflation. The Government had a quick diagnosis but the solutions have not yet arrived. His bet is that international organizations, mainly the IMF, put up a part of the dollars that were lost due to the drop in exports.

Until that happens, and not wanting to slow down the level of activity, the rope is tightened to the limit. For example, the net international reserves of the Central Bank are negative and it must resort to financing lines with other central banks. The flip side is that the economy, against all odds, grew in the first quarter.

Claudio Caprarulo, chief economist at Analytica, points out that more certainty is needed for inflation to calm down.

-The exchange rate has risen strongly in recent weeks, what can happen to the price of the dollar in the coming weeks?

–In May, the official dollar maintained a lower depreciation rate for many days than in April, however, it has already reached 7% per month. This rate, in any case, implies a deepening of the exchange rate arrears. This is because inflation last month was close to 9%.

-Meanwhile, the exchange rate gap continues to be high between the official bill and the free dollars…

-The exchange gap returned to 100% and that is its floor. The thing is without dollars there is no other possible scenario. To the lower supply of foreign currency that we mentioned due to the drought, we must add a greater demand as a result of hedging positions of savers and companies in an election year.

So, the uncertainty of the economy is reinforced by that of politics. We all know that there is going to be a change in the macroeconomic regime starting in December, but no one is quite clear about which one we are heading towards.

– Within the framework of the little genuine inflow of foreign currency, what can lead to the shortage of reserves in the Central Bank?

-The The only way for reserves to increase is for the government to close the agreement with the IMF. And there are several questions. The first is whether there will be a disbursement of dollars greater than the maturities we have this year. Thus, if it is only an advance, the reserves will only grow temporarily.

Conversely, if the loan includes net disbursements, the Government may be tempted to validate a higher level of activity and we will also see a transitory increase.

The third option is that, on the contrary, they seek to have a more robust position that allows giving credibility to the depreciation rate, dispelling the ghosts of an exchange jump, but at the cost of a lower level of activity.

Given the lack of dollars, the government must decide which variables it will prioritize in the middle of an election year to gain greater credibility.

-Inflation has a very high inertia and in May it was around 9%, how can you continue the behavior of prices in this electoral year?

–We are in a high inflation regime, with each passing day there are more indexed prices and expectations quickly translate into higher prices. In the best scenario, the next few months the monthly rate will be close to 8%. But everything depends on the credibility that the Government manages to give to the economic policy and that it avoids a strong devaluation. Otherwise, we may see another jump in inflation and reach double digits per month.

-So, what scenario can be presented until the end of the year?

-The objective conditions are very harsh, as a regime of high inflation, historical drought and without access to credit markets. The manual solution would be a devaluation and seek equilibrium in the exchange market. But without a possible increase in the supply of dollars in the short term, and in his last year in office, it is logical that the Government does not seek that path.

Thus, Massa and team bet on reach December without sudden changes at the cost of deepening imbalances. For now, and with the associated costs, they have been achieving their goal. For this reason, in the coming months, as we get closer to the elections and the farm liquidates even fewer dollars, the situation is going to be more complex, putting its strategy to the test again.-