Forecast revisions after the mid-term elections
The defeat of the government coalition in the midterm elections seems to have encouraged President Alberto Fernandez to pursue an agreement with the IMF. He probably considers that going into arrears with the official creditors will affect governance in the two remaining years of his mandate, which already look difficult due to the economic and social upheavals that explained the electoral results.
He and his supporters, governors and trade union leaders are sending messages to Vice President Cristina Fernández de Kirchner saying that they will not go along with her confrontational attitude toward the official creditors. Therefore, even though there is still a lot of uncertainty on the final outcome of those negotiations, we will assume for our forecast that there will be an agreement with the IMF early next year.
From July 2021 until the day of the election the Central Bank had been selling foreign reserves to influence the exchange rate of the dollar in the “retail” portion of the bond swap market. The day after the election, the Central Bank stopped intervening, and the implicit free market exchange rates reunified at the level of the “wholesale” market, 15% above the previous exchange rate of the “retail” sales. This was done as an initial step to prepare a plan to negotiate with the IMF.
Simultaneously, the Secretary of Energy required the companies that distribute electricity to print in the bill of each consumer the amount of subsidy implied by the freeze of the electricity rates, as an action that provides the informational base for a segmented adjustment in prices to reduce the subsidies. Minister Guzman had tried to implement such an adjustment early in the year, but the Vice President opposed it, and the adjustment was postponed. Now it appears that President Fernandez has decided to apply the adjustment, no matter what the Vice President thinks.
The economic plan the Economic Minister is preparing will, at least, incorporate the following changes in the course of events that characterized the eight months prior to the election:
1. Acceleration from 1.5% to probably 4% in the pace of peso devaluation in the controlled foreign exchange market;
2. A significant adjustment in the prices of electricity and natural gas to reduce the subsidies to the energy sector;
3. An increase in the intervention interest rate of the Central Bank, to try to increase the re-absorption of monetary emission and to keep the monetary base increasing below the rate of the devaluation of the peso in the official market.
In our July forecast we estimated recovery in 2021 to be only 6%, but in reality, it was much higher, so it is now estimated to be 9.5%. This faster recovery is explained by the low rate of devaluation compared with the rate of money emission and the freezing of many prices, in particular, public utility rates. We keep the same 2.4% growth as our forecast for 2022.
Inflation will increase significantly, to 4% per month on average, so we estimate that, annually, it will be 60% in 2022. We assume the rates of inflation and of devaluation will be similar, and the rate of growth of the main monetary aggregates will be around 50%. The increase in the rate of inflation above the rate of monetary expansion originates in the monetary overhang that exists at the end of 2021 and the expected release of the inflation that remains repressed by the price controls and utility rates freeze.
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