The new government’s priorities are to raise domestic demand and real wages; lowering inflation isn’t an immediate concern

ARGENTINA - Forecast 17 Dec 2019 by Domingo Cavallo

Since ex-president Mauricio Macri lost his party’s presidential primary in August, inflation has accelerated, recession has deepened, fears of debt default have obscured the financial scenario and the IMF program has been put on hold. GDP has contracted 2.5% in 2019, and real wages have fallen 10%. Alberto Fernández took office December 10th, and his government has announced that it will focus on halting economic contraction, and reversing real wage decline. Though inflation is running at 55% per year, its highest annual rate since 1991, it goes without saying that disinflation won’t be an objective.

As it has lost access to capital markets, monetary emission will be Argentina’s only source for financing the fiscal deficit and raising funds to service peso debt that, considering the nature of the creditors and their own financial needs, won’t admit new re-profiling.

National public sector debt due in 2020 is $63.8 billion, of which $32.5 billion is due in pesos and $30.9 billion in foreign currencies. Peso debt will likely be paid via monetary emission and new peso debt, either by issuing new domestic debt or more likely, via a restructuring imposed upon debt holders by law.

Considering that the bulk of the interest payments and amortizations of principal in foreign currency during 2020 correspond to Treasury bills and bonds under Argentinean Law, and only a small proportion is under Foreign Law, it is possible that the restructuring will be achieved without producing a default. That’s because foreign bonds will very likely continue to be serviced until a restructuring agreement is achieved via Collective Action Clauses.

The government could cut its interest payments to 2% of GDP in 2020, and 1% of GDP in 2021, from the 3.6% of GDP in 2019. But it will have to commit to payments after 2021 that will gradually converge to 3% of GDP after 2022.

Though the government says it won’t make further fiscal adjustments in 2020, it actually means no further cuts in public spending as a percentage of GDP. But it will try to increase taxes on the private sector. It has already begun, by raising export taxes. Very likely this won’t be enough to cover spending linked to Fernández’s promises for social programs, and salary and pension increases. So the primary fiscal deficit will rise.

Though further real wage decline may be avoided, the economy won’t recover. Under the best scenarios, 2020 GDP decline could be less drastic than in 2019. But growth won’t turn positive.

The official exchange rate is 63 pesos per dollar, 20% above the purchasing power parity exchange rate of 52 pesos. We assume this gap will be closed in 2020, as exchange controls will prevent sharp devaluations in the official market. If the official dollar price rises 43%, we should expect inflation of above 50% in 2020.

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