Inflation, poverty, debt and few dollars: a bomb called Argentina

The Argentines They will elect president on October 22, tormented by inflation of almost 140%, with nerves frayed by a currency crisis and public accounts exhausted due to lack of foreign currency, a bomb that will seek to deactivate the government that takes office on December 10.

The situation will demand an adjustment whose dimension will begin to be decided on Sunday at the polls, agreed analysts consulted by AFP.

The favorite in the polls, the ultra-liberal Javier Milei, directly proposes dollarizing the economy; the conservative Patricia Bullrich, shrink the State and free the exchange market; and the Peronist Sergio Massa, current Minister of Economy, is campaigning promising to promote exports and development with social inclusion. Everyone talks about fiscal order.

Here are five economic challenges they will face:

Huge inflation

“It gives me chills to do the shopping, from the chango (cart) I went to the bag and now with one hand to spare“Lidia Pernilli, a 73-year-old retiree who just bought two bananas at 1,000 pesos per kilo, told AFP, 1 dollar at the parallel exchange rate that almost triples the official price.

Inflation, 12.7% in September and 138% annualized, is one of the highest in the world. It jumped to double digits in August, when the government devalued the peso by 20%.

In Argentina there is practically no credit. In October, the Central Bank raised the interest rate for deposits from 118% to 133% annually, to discourage savers from fleeing to the dollar.

Exchange imbalance

After decades of high inflation, Argentines distrust the peso.

Exchange controls have been in effect since 2019, resulting in a series of restrictions.

The ‘blue’, or parallel, dollar jumped from 850 pesos to 1,050 last week. At the end of July I was halfway there. The gap with the official dollar, at 365 pesos, is an abyss.

“The dollar can continue to rise because there is no political anchor”said Elizabeth Bacigalupo, chief economist at the consulting firm Abeceb.

The market “thinks that Bullrich or Massa can impose a stabilization plan, but what Milei proposes is disruptive and there is fear”, he noted.

Lorenzo Sigaut Gravina, economist and director of the consulting firm Equilibra, also indicated that “the economy is not growing” and estimated that in 2023 activity will contract 2%.

No reservations

This year, Argentina suffered a historic drought that hit the countryside, the main export sector. For this reason, it stopped receiving about US$20,000 million (about 3 points of GDP).

That blow led the International Monetary Fund to relax the goals of the US$44 billion program that Argentina took in 2018.

To meet its commitments, the country resorted to a loan from Qatar, yuan from a swap (currency exchange) with China and a bridge loan from the CAF.

The total reserves of the Central Bank are around US$25,000 million. “But the net results are negative by US$ 5,000 million and he continues to spend the last cartridges to support the exchange rate, because Massa still has a chance of winning”, evaluated Bacigalupo.

The Central Bank absorbs the strong monetary issue to finance the fiscal deficit, with short-term securities at very high rates.

“A stabilization plan will be needed and whoever applies it must have political power, because the measures will generate more inflation until the dollars from the harvest enter in April.”Sigaut Gravina warned.

Social fragility

The biggest challenge will be to balance the accounts without causing a social outbreak, in a country with 40.1% poverty and 9.3% indigence.

Millions of people receive subsidies on water, gas, electricity and transportation rates, in addition to economic aid.

“These subsidies will have to be reduced. There will be a high social cost and political tensions“, considered Bacigalupo.

Milei promised to dollarize and eliminate the Central Bank as a way to end inflation.

According to Lorenzo Sigaut, “it is impossible because there are no dollars and it would require a maxi devaluation or external financing.”

For Bacigalupo “Such exorbitant values ​​of the dollar – about 4,000 pesos per bill – are necessary to dollarize, which would be socially unfeasible.”.

Energy and harvest, a hope

The Buenos Aires Grain Exchange projected that the soybean harvest will increase 138% in the 2023-24 campaign after the severe drought, and the corn harvest by 61%, in a booming agro-export context.

The next government will save foreign currency on energy imports thanks to the operation of the new gas pipeline from the Vaca Muerta reserve.

“If we take advantage of it, it can contribute more than US$ 10,000 million per year and added to the reversal of the drought, the exploitation of lithium and renewable energies, it will provide key dollars for the stabilization transformations”said Bacigalupo.