Struggling with stagflation

ARGENTINA - Report 12 Apr 2019 by Esteban Fernández Medrano

Macri´s political outlook into the October elections continues to face the challenge of overcoming adverse economic indicators. This is taking place despite the financial support of the IMF, whose USD 10.8bn tranche reached the BCRA reserves this week. The combination of very high inflation and a harsh recession defines a complex background not only for maintaining the internal coherence of the “Cambiemos” alliance but also, more importantly, regaining the support of the independent middle voter, a voter who, while not wanting a return of a Kirchnerist government, remains disappointed by the poor economic results of the current administration and is looking for a still-uncertain third alternative.

The drop in real wages and employment, which combined, created in Q4 the worst loss in real labor income since 2002, drove the government to step back from some of the market deregulation. Similar to the “temporary” re-implementation of export taxes late last year to curb the fiscal deficit, the government is currently in the process of setting up an emergency six-month broad-based price agreement with a particular focus on food, i.e., to try to soften the direct link between FX rate and prices of tradable goods. Of course, the idea is to set an environment of more controlled inflation ahead of the current rounds of union wage negotiations.

In our most recent reports, we have been analyzing different leading activity indicators to get a sense of whether there are signs of economic improvement before the official start of the electoral campaign in June, the primaries in August, or the presidential elections in October. In this report, we add to this analysis the recently published 4Q18 data, as it provides a more detail-rich perspective.

Finally, we revisit the monetary stance that the Central Bank faces in its sterilization policy, as the hikes in February/March in the LELIQ rate would set the BCRA debt dynamic back onto an unsustainable path.

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