The monthly survey of market expectations carried out by the Central Bank among 42 economic teams revealed that the median of the responses is 50% inflation for next year. If the most optimistic and pessimistic 10% are excluded from the sample, the range of responses varies between 39.6% and 57.8%. This means two things. Firstly, absolutely nobody believes in the national budget forecast of 29%, not even the official banks that participate in the survey. Secondly, next year’s inflation will still be higher than in 2020, even for optimists.
At Econviews we believe that inflation will be greater than 50%. Our base scenario is 57% accumulated to December and an average of 54.8%. Of course, the number depends on many factors, such as whether the government dares to adjust the prices of public services and, if so, when, and how much. The government has the capacity to lower inflation with regulations, but all with fiscal (and activity) costs since subsidies are increased and supply is discouraged. Beyond political factors that will influence the final number of the CPI, there is a fiscal and monetary dynamic that is difficult to break and that has already started to play. Inflation of unregulated prices is not only higher than the CPI, but it has been growing in recent months.
The reasoning is simple. Argentina does not have access to international markets and the government seems to have decided not to ask the International Monetary Fund for more money. So, the main problem is that the deficit conditions monetary policy because what is not raised in the local market and some loans that could come from international organizations, the rest will have to be issued. In the jargon this is called “fiscal dominance”.
Our account is that the deficit of the national public sector will be at least 5% of GDP (3.5% primary and 1.5% in interest) to which should be added at least a 3% quasi-fiscal deficit. If monetary liabilities are 9% of GDP and the effective rate is 40%, that gives 3.6 quasi-fiscal points. In other words, on a super optimistic floor, the government needs to cover 8 points of GDP without counting principal maturities. We can assume that the local market refinances everything that expires and adds 1 or even 2 points of GDP. The rest must come from the printing presses. We cannot ask for more effort from the local market because it is small and, the more the public sector takes, the less private credit there will be available, complicating the recovery and normalization of the economy.
A non-trivial point is that in this scenario there is also no space for the Central Bank to issue to buy reserves. And to top it all, 2020 ends with an excess of money (measured as M2 over GDP) of around 15%. Understandable for the emergency spending due to the pandemic, but the fact that the origin of the problem is logical does not eliminate the problem.
To put it in numbers, next year the total deficit including the BCRA may be around 3.6 trillion pesos. If the market finances all the interests and maturities of that amount, there are 3 trillion to be issued. A part will be sterilized by Leliqs, but so that the BCRA’s liabilities do not exploit, the stock will have to be dilluted with the inflationary tax, as well as the current excess of pesos.
Can it be achieved with inflation below 50%? Yes, but it requires a lower deficit to reduce the 3.6 billion, higher demand for pesos or administrative measures that have costs on the other hand. For the deficit cut, we see a low tolerance for policy adjustment, with which our number of 1.5 trillion primary deficit is already more benign than the one arising from the median of the market survey (1.62 trillion). To generate greater demand for pesos, it is necessary to grow faster and improve credibility. With an empty Central Bank and a 50-60% gap between official and market FX rates, it seems that monetizing the economy as an option looks difficult. Furthermore, the interest rate today is behind inflation and inflation expectations. The BCRA seems to be afraid of the explosion of the quasi-fiscal deficit with a higher rate, but low rates discourage deposits, which are the ones that finance Leliqs. The blanket is short on all sides.