Report from Buenos AiresMay 10, 2016
Last month the inflation rate in Argentina was 7%. That’s right, 7% in a single month. Why?
The new government is trying to remove huge subsidies that the previous government put in place. The former government had no way to pay for the subsidies, so they resorted to money printing and thus triggered the acceleration of inflation. Removal of the subsidies has spiked prices.
Meanwhile, the estimated “core” inflation rate is about 2%. But the issue with both inflation estimates is corrupted data. The previous government did away with true data accumulation. They didn’t like the reported numbers, so they just stopped compiling them. They did the same thing with crime statistics and poverty line estimates.
Now a new government inherits this mess.
The Argentine central bank is trying to fight the inflation using the Paul Volcker method of higher interest rates. The most recent central bank auction for 30-day paper had an annualized interest rate of 37.5%. The ultimate rate to a borrower using Argentina pesos for the transaction annualized at about 50%. Note US dollar rates are in single digits.
The new government is trying to phase out currency controls and open up freer exchange rates, but the high inflow of US dollars is exerting upward pressure on the peso versus the dollar.
Thus the devaluation adjustment the new government seeks is blunted by the revaluation force of dollar inflows. Sorting all this out is a challenge for the fledgling government, which must keep one eye on the old political forces that are attempting to undermine the new initiatives.
The trip here is proving fascinating. Our delegation meets privately with the highest levels in the ministries and central bank. We are reviewing the outlook for investment. That outlook is hugely positive if the new government succeeds and very-high-risk if it fails.
Legislative elections in October of next year hold the key to expanding the new government’s base or weakening it. Right now the outcome is difficult to predict. Volatile early polling is of little value.
Argentina shows great promise. It has done so for over a century. But sequential governments have lurched between extreme dictatorships and attempts at functioning democracies. No one political form has become deeply institutionalized and therefore durable.
Will this time be different? Can votes, not guns, lead to change for the better? How powerful is modern social media as a political tool in 2016? Can it defeat tanks and militarized police? And can capital inflows help to create a growth model, improve jobs, and add to productivity?
We will know quickly. The new government doesn’t have the luxury of time.
We transit to Uruguay on the Wednesday afternoon ferry.
The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.
The preceding is a commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at http://www.cumber.com/commentary_archive.aspx.
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