University of San Andrés (Argentina) Can Massa succeed?
At first glance, it seems not. He assumed the Ministry of Economy of a government with crossed leaderships, without a strategy and without a time horizon. A hot potato, with rampant emissions and inflation, a chronic fiscal deficit and no internal or external financing. So fragile is the context in which the Government has entered, that it would be enough for the opposition to anticipate that it will not pay the dollar futures or the debt in pesos to cut short any possibility of controlling the situation, which, in turn, would precipitate the electoral defeat of the ruling party.
It is evident that Massa does not have it easy. If you intend to reverse this dramatic picture, you have two fronts to attack: how to resume growth (which the Government metaphorically called “putting the economy on its feet”) and macroeconomic stability (which the Government metaphorically called “calming the economy” ). They are two objectives. elusive for now. The economy did not even manage to overcome the cat’s and, in terms of reassuring, well…. we are like Carmen Maura in Women on the verge of a nervous breakdown.
To attack the growth issue, there is an item on the agenda that is exclusive: the total liberation of the exchange rate trap and restrictions on exports. Taxing exports to subsidize imports, while freeing capital flight and prohibiting the remittance of profits, is the ideal recipe to bring production to its knees and agonize forever over reserves (something the government metaphorically calls “the external constraint”). The release of the stocks would bring immediate benefits on investment and production and would lower free exchange rates. There is no Argentina standing with a currency trap, and better today than tomorrow to get out of it. Nestor Kirchner knew this, which is why he never went down that road. We’ll see if Rubinstein remembers those good old days.
But where I want to put the magnifying glass is on the stabilization objective, which also has an exclusive item on the agenda: fiscal balance. Nestor Kirchner knew how to have a fiscal surplus, then Kirchnerism lost its way. Or maybe he never had it and that was fortuitous. We will never know.
In this field, pessimism is widespread. It is shown by the price of the bonds. The arrival of Massa and the better chances of the opposition is not reflected in an improvement in the price of Argentine assets, unlike what happened in 2015. Seeing is believing, says the market. Even those who think that things are going to get better are convinced that, before that happens, things will get worse.
This picture of pessimism reminded me of the first months of Eduardo Duhalde’s administration. In post-convertibility he had inherited a society with unanchored expectations. The value of the dollar had risen from one to four in weeks. The Central paid more than 100% rate in the Lebacs and the economy continued to fall in what would eventually be a drop in GDP of 11%. The economy was in default and the banks were closed. But the monetary shock of the asymmetric pesification had generated a jump in prices of 40%. In a paralyzed economy and without updating mechanisms, public salaries and pensions remained frozen. With frozen expenses and taxes that rose at the rate of inflation, the result was an immediate and resounding improvement in fiscal accounts. A primary deficit of 1. 300 million in March (these were other prices) turned into a surplus of one billion in May, and then remained in positive territory. In June, the country reached a fiscal surplus for the first time in a long time. The result of that June fiscal surplus worked like a balm, the foreign exchange market stabilized, the risk of Argentine assets collapsed and the economy entered a whirlwind of growth that would last almost ten years until, in 2011, the stocks cut it off .
I say that that situation reminded me of this one, because it has similarities. In particular, the ability that Peronism has to delay salaries and pensions (pensions have already fallen by more than 10% in real terms with this government), without receiving stones or criticism. Not to mention implementing cuts in education and health. In education without even the kids from Franja Morada protesting. And in health, well…, it seems that it is not a matter of money, it is enough that it be a Ministry. Peronism can raise rates without a protest, to the point that they almost forget to hold the public hearings for which Macri had to wait six months and then listen to speeches for a week.
This ductility reminded me of that situation because, in this context, inflation is a lethal weapon against the deficit. In 2002, ductility was the product of a society paralyzed by terror. In 2022, it is the product of a political and union corporation that understands that its political project will be mortally wounded if it does not allow quick corrections.
So let’s see what 2002 would be like in 2022. Let’s assume inflation of 5% per month until the end of the year and that Massa respects retirement mobility, but manages to keep the rest of nominal spending constant until the end of the year at August values (respecting, yes, seasonal variations). These two assumptions (how easy it is to say them!) are enough for the Government to show a primary surplus in November. With these assumptions, the primary deficit for the entire second half would close at 1% and for the year at 2%.
Although in December it would again have a deficit due to the pension update and Christmas bonus, even leaving the variables constant in real values, this year’s adjustment allows for a primary surplus of more than two points of GDP in the first half of next year. In other words, just like Duhalde in 2002, keeping nominal spending constant for a few months is enough to close the fiscal gap.
But of course, one thing is an Excel spreadsheet, which resists anything, and another is the political restrictions that we know in Argentina get worse, especially when things start to improve. Keeping nominal spending constant requires raising rates (so that subsidies do not grow), continuing to dilute public salaries and reducing programs. Seeing is believing…, but the taba is in the air, and it does not seem impossible to achieve it, especially for someone like Massa who knows that his political future depends on him doing it.
I tend to have an optimistic bias. But we must never forget the fundamental theorem of Kirchnerism: “it will always be worse than you think”. In reality, the situation seems closer to what Oscar Isaac faces in one of the latest Star Wars movies. Faced with an impossible challenge, he reflects: “There are a million ways it can go wrong and one way it can go right. So let’s try it.” n