The Economy Ahead: 2023 Started With A Rising Dollar And Unabated Inflation

The election year has already started and, even if the candidates are not yet defined, it is clear that the political tension will shift to the economy and finances. In this context, high inflation, on the way to reaching 100% per year, according to the latest market forecasts revealed by the Central Bank, and the reaction to the rise in the rate of the dollar, will worsen the outlook for the months to come.

After the first weeks of the year, these two variables have already set a precedent for what is to come and analysts have given their explanation of the effect they will have on economic players, from large investors to consumers and savers. .

1- The rate of consumer prices. While the economic team aimed to achieve a monthly inflation level of 3% during the first quarter, the consultants have more pessimistic projections. The IPCBA (Buenos City Consumer Price Index) rose to 7.3% in January to reach an annual variation of 99.4%. It posted a notable acceleration from 5.8% in December. If the national CPI reported by INDEC registers a similar trend, the “start with 3” target for April will be very far, as announced by the Minister of Economy, Sergio Massa.

“A first stumbling block is inflation. Those responsible for the economy hope that it can gradually decline -they were venturing up to 60% per year-, but in fact the increases in services, prepaid, food, etc., continue to be authorized, with which the pressure on wages will not be long in coming and therefore the upward spiral of inflation will not tend downwards. In this context, the real growth of economic activity may not be the desired one due to the lack of confidence in the country,” he explained. Javier FuentesTax manager of PGK Consultores.

2- High nominality of the economy. Inflation and the dollar will continue to be supported and even have repercussions in the months to come. “It is difficult for inflation to come down this year compared to 2022, mainly due to two factors: the drought and the dynamics of the peso debt, which we believe will put pressure on the parallel dollars throughout. long of 2023″, underlines a report of the Counselor 1816.

Since the peso debt crisis, which forced a purchase of securities on the secondary market from the hands of the BCRA, “the market does not want duration: Over the past four months, the Treasury has had an average investment period of only 4 months. There is no – real – post-election demand,” says Invecq Economic Consultant.

With shorter settlement terms, higher rates and a predominance of index-linked instruments, peso-denominated Treasury debt poses the challenge of “a bunch of maturities in the previous election: 70% of over 8.8 billion pesos (8.8 trillion dollars, more than 10% of GDP in 2022) maturing between April and May are pegged either to the official dollar (dollar bonds related), inflation (CER debt) or whichever of the two rises the most (dual)”, warned Invecq.

The external front continues to deteriorate due to the collapse of the liquidation of agriculture

“As for the peso – even if the commitment with the IMF of the budgetary deficit and its financing were assumed – it is far from having broken budgetary dominance. The stock of debt in pesos -fiscal and “quasi-fiscal” – and the subordination of monetary policy to exchange rate policy -ie, “soybean dollar” – suggest a monetary dynamic that increases expectations of higher nominality. The exchange carried out in January – which, although it had some success – managed to carry over some two trillion pesos in the vast majority with maturities that do not exceed the months preceding the elections. This means that the problem has not been resolved, but postponed,” he said. Jose Maria Segurachief economist of PwC Argentina.

3- Reserves that do not grow. The BCRA has positioned itself as the net gainer in currencies at the start of 2023. The gross assets of the Central Bank have lost around $3.6 billion or 8% so far this year. Invecq clarified that “after the 2 soybean dollar, the liquidation of agriculture fell: the agro-industrial complex liquidated 928 million USD in January”, the weakest result since records have been held since 2003 “Even last month’s record is historically low: it represented almost half (46%) of the monthly contribution of agriculture during the first quarters of the last 10 years”, underlined the consulting firm which manages Esteban Domecq.

“These factors, together with payments to the IMF of almost $3,000 million since the beginning of the year and the purchase of sovereign debt, have reduced the stock of net reserves to just over $4,300 million ( IMF metric),” Invecq calculated. .

4- IMF conditioning. The negative reserves bias should be reversed immediately to achieve the objectives of the agreement with the International Monetary Fund.

“We ratify our base case that there will soon be more inventory and a third edition of the soybean dollar. Regarding this last point, we do not exclude that it will be in March to reach the reserve target for the first quarter. “, which was compromised by what happened in January. According to our figures, the BCRA will have to add some 1,500 million dollars in the next two months to comply with the Fund, which seems more than difficult”, have they assessed from Consulting 1816.

Invecq’s analysis points out that “operations with the IMF in 2023 do not imply a net inflow of foreign currencies as in 2022 ($5.1 billion), but on the contrary a net outflow of almost 2.6 billions of dollars. In particular, given the December 2022 disbursement, payments to the IMF for 2023 are only fixed until June”.

5- Economic stagnation and more stocks. Low BCRA reserves are also influencing activity levels, due to the restriction of foreign exchange for production. The stagnation of the economy has become visible in recent months and it is difficult to assume a significant GDP reaction until the elections.

According to INDEC’s EMAE (monthly economic activity estimator), November recorded the third consecutive month of decline in the seasonally adjusted indicator. This had to do with a contraction in demand for private money due to controls in the foreign exchange market. According to the cash basis, imports have decreased by 18% from previous levels in 2022 since the imposition of the SIRA (Import System of the Argentine Republic).

“At the local level, with a global context that is pushing less, the economic situation is getting more complicated. As it becomes more evident that economic activity is stagnating, inflation accelerates and the BCRA loses international reserves. A bad combo to perpetuate the good performance which have marked local financial assets over the past two months”, summarizes the economist Martin Polo, Cohen’s chief strategist.

business analyst and advisor Salvador DiStefano said that “the Central Bank requested exporters a total of USD 2,087 million before exports, and deferred import payments for approximately USD 12,807 million, if these payments were up to date, the Central Bank’s reserves would be negative, much worse than what he inherited Mauricio Macri in 2015.”

“It implies that the reserves of the Central Bank are financed by the deferral of foreign trade payments and the advancement of exports, it implies that the country has no credit and that foreign direct investment does not manage to inflate central bank coffers,” Di said. Stefano.

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