A sold out model

One of the variables that is closely monitored in periods of economic crisis is the level of international reserves of the Central Bank of the Argentine Republic (BCRA). Its main role is dual: the support of national money in circulation and the power of fire to intervene in the exchange market.

Net reserves are obtained after discounting both the currencies owned by the private sector and those committed to other purposes, such as debts and pending payments. Net reserves are currently estimated to be in negative territory, at about $1.5 billion. In other words, the BCRA no longer has its own reserves, and for its current operations it is appealing to the rest of the currencies at hand, such as the swaps with the People’s Republic of China or the private deposits embedded in the entity.

The depletion of reserves is basically the result of a scheme of economic operation that permanently requires “boxes” to consume on the short-term altar.

consequence of populism

The economic model applied by populist governments seeks a rapid increase in disposable income in the economy, especially in sectors with a greater predisposition for consumption. This generates growth in the economy in the short term, an “economic summer” that is, at the same time, the seed of future crisis situations.

The key in this scheme is the search for immediate results, in terms that have much more to do with elections than with the search for true development and economic progress, which requires longer times associated with the generation of savings and investment. long-term or structural.

The search for the immediate improvement of income leads to the fact that the easiest path is identified with the increase in public spending. The sources of financing of a growing expense are the taxes on the private sector, and when this is not enough, the indebtedness and the monetary issue.

Faced with the growing insolvency of the State, and to sustain the epic of a redistribution of income towards unproductive and prebendary sectors, it was key to appeal to flows and stocks that serve as extraordinary resources, to delay the negative effects of these policies. Thus, he took advantage of boom of the commodities to, through withholdings, appropriate an important part of the dollars produced by agriculture. Later, it was identified stock important private pension savings, which was expropriated.

Without access to the international capital market, the successive growth in the size of the State was sustained by a growing monetary issue, closing the circle of confiscations of stocks and appropriation of flows through the return of inflation to destructive levels like the current one. The main problem with this type of economic scheme is that, in each application round or cycle, once the short-term effects have passed, the economy goes down one notch and the income level of the population falls.

Data and story

The description of the populist model of a sharp increase in public spending and the engulfment of stocks and flows adapts particularly well to the last governments of Kirchnerism.

The primary deficit started at less than 1% of GDP in 2011 and multiplied until it represented, well measured, 5% of GDP in 2015. Monetary financing to the Treasury covered 3% of GDP that last year. During Macri’s presidency, the deficit followed an opposite path, and it was gradually eliminated (it closed at 0.4% of GDP in 2019), however, the size of spending remained high and it was necessary to resort to the IMF in the absence of financing.

In the current government, the reported post-pandemic deficit was 2.4% of GDP in 2022, and in the first four months of 2023 the primary deficit was already 0.6% of GDP, far from the partial goal agreed with the IMF. projecting an annual deficit of at least 3.5% of GDP.

What generates a new negative effect is the strong monetary financing of the Treasury. Beyond the fulfillment of the direct financing goals to the Treasury (1% of GDP in 2022 that was met and 0.6% of GDP this year that will not be met), we must add the monetary issue generated by the purchase of government bonds Treasury in the secondary market, plus the amount needed to close the gap between the soybean dollar and that sold to importers who can access it. The issuance for the treasury in 2023 will be equivalent to 5% of GDP. Then, during this government, there will have been an average emission of a monetary base per year, only to finance the policies of the national government. This is a box of relevance to the economic scheme.

Another of the boxes with which the current period recounted is the one associated with primary exports. Mounted on a new bullish cycle for the terms of trade for our country, and especially for the soybean price, which once again touched peaks similar to those observed in 2008 or 2012, it could be seen that in the last two years only the liquidations of Cereal and oilseed currencies contributed resources that exceeded the decade average by US$ 33 billion. In other words, there was a flow of extra currency in our country equivalent to two thirds of the loan with the IMF.

However, economic policy chose the official exchange rate as the anchor, causing dollars to slip away month by month between imports and the formation of foreign assets (purchases by individuals). Added to this is the political instability that generates a de facto dollarization of the portfolios of Argentines.

not in reserve

Thus, a situation of exhaustion of net international reserves was reached, despite the multiple traps to access the dollar and restrictions on imports.

The inflation created and multiplied by government policies generates a feedback of the process, since it drives a drop in the real exchange rate and an expectation of greater devaluation in the future. Expectations are fed back when measures are announced that only “cosmetically” attack inflation.

In a low-gas car analogy, the government could have planned to reach the end of the term, or even the elections, at least “in reserve.” But the drought appeared, which in this campaign will subtract dollars from the economy for between US$ 24 billion and US$ 29 billion, which makes it very difficult to sustain the exchange rate anchor scheme, since it does not have the reserves to it.

Without stocks nor flows to lay hands on, electoral measures to promote short-term consumption are blurred. The latest economic announcement seeks to fuel the population’s consumption through more household debt, that is, using the family’s own future income. With no funds on hand for a “silver plan”, a “silver card plan” is presented. The car is out of fuel, and to keep going it desperately needs fresh funds. The Minister of Economy travels to China.