Date: 2024-12-21 Page is: DBtxt003.php txt00023064
ARGENTINA
ECONOMIC CRISIS - MASSIVE INFLATION
Why 70% Inflation Is Just One of Argentina’s Problems ... and nobody seems to have a clue about possible policy options
ECONOMIC CRISIS - MASSIVE INFLATION
Why 70% Inflation Is Just One of Argentina’s Problems ... and nobody seems to have a clue about possible policy options
Demonstrators with a sign “Argentina Wants Justice” during anti-government protests at the Plaza de Mayo in Buenos Aires, on Aug. 18.Photographer: Anita Pouchard Serra/Bloomberg
Original article: https://www.bloomberg.com/news/articles/2022-08-31/why-70-inflation-is-just-one-of-argentina-s-problems-quicktake
Peter Burgess COMMENTARY
What is the root cause of inflation in Argentine? What are the different manifestations of inflation ... and which of these variants is driving inflation in Argentina.
There are many problems with 'national' accounting. One of the very real problems is that a 'nation' as a 'place' cannot disappear. In 'corporate' accounting a corporate entity can go bankrupt and disappear, but in the case of a 'nation' it keeps on existing as a place together with all its economic history.
Peter Burgess
Written by Patrick Gillespie ... @Pat_Gillespie
August 31, 2022 at 5:00 AM EDT
Argentina is facing some of the world’s highest inflation, with rates that have topped 70%. The government is on its third economy minister since July and President Alberto Fernandez’s leftist coalition looks permanently split. South America’s second-largest economy has almost no access to international capital, and it owes over $40 billion to the International Monetary Fund. Any bright spots? So far, a population hardened by decades of economic crisis has not turned to the kind of violent street protests that brought down the insolvent government of Sri Lanka. But the most likely paths forward all involve significant levels of pain.
1. How serious is Argentina’s crisis?
Argentina nosedived into an economic crisis in 2018 and it’s still far from fully recovered. Annual inflation has been above 50% about half the time since then, exacerbating three years of recession. Nearly 40% of Argentines live in poverty today, compared to about a quarter at the start of the crisis. Argentina has spent more time than almost any other nation in recession since the 1950s, according to the World Bank. Still, today’s price gains remains far from country’s last bout of hyperinflation in 1989 and 1990.
2. How did things get so bad?
A currency crisis led to the peso losing half of its value against the dollar in 2018. The IMF responded by loaning a record $57 billion to the government led by then-President Mauricio Macri, but the deal failed to stabilize the economy. Fernandez’s election in 2019 sparked a massive selloff in government bonds that his government later defaulted on. Without access to credit following the default, Fernandez printed money during the pandemic to finance cash handouts and salary programs, which set the stage for inflation to surge higher.
3. Where do things stand?
In March, the IMF and Fernandez negotiated a new deal with the IMF. The primary purpose from the government’s perspective is that it pushes out payments owed from the first program -- so long as Argentina complies with the deal. Although the original repayment schedule remains in place, the new deal disburses IMF money to Argentina in a timetable that refinances the original payments by at least four years. But the IMF doesn’t just give all the money at once. Argentina has to pass quarterly reviews where the government must show progress on key yardsticks, such as accumulating foreign reserves and cutting its fiscal deficit. If it doesn’t pass the so-called review, Argentina risks defaulting on the IMF loan, which would remove almost all remaining sources of international financing for the country.
4. Is Argentina at risk of running out of money?
The central bank is running low on net cash reserves, down to an estimated $2.1 billion as of last week, according to consulting firm Equilibra. Total reserves are at less than half the level they were in 2019. That’s raising the risk of a potential currency devaluation, which in the past has provoked social tension. The very expectation of a devaluation is causing more people to buy dollars, hold exports or speed up imports, exacerbating the government’s greenback drain. A gap between the official exchange rate and a smorgasbord of parallel rates has held above 100% for over a month, a level and stretch of time not seen since Argentina’s hyperinflation days. The gap creates perverse incentives, like buying stuff on a credit in dollars only to pay it down in pesos at a discount, that only put more pressure on the exchange rate.
5. What’s the government’s plan?
So far, there hasn’t really been one, besides trying to meet the goals set in the IMF deal. Fernandez said in a 2020 Financial Times interview: “Frankly, I don’t believe in economic plans.” The most consistent theme of his policies have been a reliance on piecemeal steps to limit economic pain, such as temporary price freezes and a ban on firing workers. That’s one reason markets are hoping new Economy Minister Sergio Massa will at least implement some of the tough policies built into the IMF deal. A key test will be whether Massa can address energy subsidies that have largely protected Argentines from the soaring utility prices seen around the world.
6. How does politics figure into this?
Analysts across the spectrum agree Argentina’s main issue is political, not economic. The infighting between President Fernandez and his powerful Vice President Cristina Fernandez de Kirchner (who is unrelated), has created a leadership vacuum. Fernandez and Kirchner, who was president herself from 2007 to 2015, disagree over economic strategy. Kirchner’s loyalists favor measures like introducing a universal basic income and have impeded Fernandez’s policy makers from implementing unpopular measures, such as utility price hikes. Beyond that split, Fernandez is up for re-election next year, when he’s expected to have a limited appetite for unpopular moves. The increase in poverty and economic impact of inflation also make austerity measures with short-term political costs and long-term economic gains harder to push forward.
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The Reference Shelf
- Story on Argentines withdrawing $1 billion from banks
- IMF’s first review of Argentina’s program in June
- Argentina central bank’s latest rate hike to try to tame inflation
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SOMETHING ABOUT ARGENTINA
What are the main economic sectors in Argentina?
Among the main industries in Argentina are food processing, automobile production, textiles, energy production, and mining. The nation also has a growing chemical industry. The service sector is now the leading component of the Argentine economy. In 1999, it accounted for 64 percent of GDP.
What is the main economic industry in Argentina?
It is a leading food producer with large-scale agricultural and livestock industries. In addition, Argentina has significant opportunities in some manufacturing subsectors, and innovative services in high tech industries.
What are the top 3 major sources of income for Argentina?
Agriculture, forestry, and fishing.
What is the most important source of economy in Argentina?
Manufacturing is the largest single sector in the nation's economy (15% of GDP), and is well-integrated into Argentine agriculture, with half the nation's industrial exports being agricultural in nature.
What is Argentina known for producing?
Argentina is one of the world's major exporters of soybeans and wheat, as well as meat. It is also one of the largest producers of wool and wine, but most of its wine is consumed domestically.
What is Argentina's main export?
Exports The top exports of Argentina are Soybean Meal ($7.89B), Corn ($6.46B), Soybean Oil ($3.9B), Soybeans ($2.31B), and Delivery Trucks ($2.3B), exporting mostly to Brazil ($7.67B), China ($5.41B), United States ($3.47B), Chile ($2.91B), and Vietnam ($2.87B).