“The cheap dollar is not sustainable”

-Beyond the fact that the results of the first year of Javier Milei’s government were better than expected, what evaluation do you make of the management?

-The best metric is to see how much room for maneuver the Government assumed and how much it has today. He clearly gained degrees of freedom and political muscle. Today the President is standing on stage with economic achievements such as the fall in inflation, the dollar under control, the exchange gap that fell very sharply and the country risk as well, activity and salaries recovering and with fewer social conflicts as can be seen. on July 9. Milei’s government has had a successful first year in economic matters and that is visible to everyone.

-What factor or factors explain these results?

-You cannot divide the economic from the political but the main government action has been the fiscal task. Javier Milei made an adjustment of almost 5 points of GDP in primary spending. If a year ago they told me that this was going to be the main spearhead of the Government, many of us thought it would fly through the air and that did not happen. That was the main surprise or, using the President’s jargon, ‘what I didn’t see’: having so much social support for an orthodox adjustment program…

-You are a baboon in that sense.

-[Risas] I’m a chump in that sense.

-The Government says that there were many baboons this year

-I am not ashamed to recognize things that I did not see because one makes a mistake. I do my work with foundations and honestly.

-Was the most difficult thing to understand was Milei’s decision to maintain an adjustment?

-Milei’s political decision was visible. Perhaps what one doubted most was what the social reaction was going to be because we are in a country with a conflictive society, as Richard Mallon and Juan Sourrouille wrote fifty years ago in their book Economic Policy in a Conflictive Society. I myself, together with Pablo Gerchunoff, have written about the distributive conflict in Argentina as a center of action in a society with high material aspirations and low tolerance for resigning living conditions in response to these adjustments. Seen all this way, 2024 has been a historic novelty.

-Is Milei a historical novelty?

-Milei’s adjustment is a historic novelty.

-Why was inflation lower than expected and expected?

-We expected that inflation in 2024 would be higher than in 2023, why was it the other way around? For four reasons. Little social reaction to the adjustment, as I said, because the Government did little to protect the competitiveness of the exchange rate by hiding inflation, because the economy has less inflationary inertia given that the participation of the formal sector in income today is lower than in past stabilization experiences such as in the 80s or 90s and because business margins had been so high in 2023 that they absorbed the increase in costs without transferring everything to prices.

-Why do you say that exchange rate policy hides inflation?

-For several reasons the exchange rate is low. But in summary, in the last 50 years there are only two moments with such a backward exchange rate: the end of the convertibility period when Brazil devalued the real in 1999 and with Alfredo Martínez de Hoz’s Tablita.

-In none of those periods was there fiscal balance, isn’t today different?

-Here what matters is what the Argentine economy will demand and what it will produce. If the real exchange rate is low, Argentine production is more expensive than foreign production, which means that the consumer will be better off buying goods and services produced abroad that are cheaper locally. And it will not be convenient for the Argentine producer to manufacture but to import. All this means that we are going to an economy with a deficit in international trade and to sustain the deficit, more exports or financing will be needed. But it has to be sustainable financing over time. Today, in my opinion, there is a drunkenness with energy and mining. I do not want to underestimate the role that these two wide avenues of dollar generation are going to play, but when you look at the numbers it is not yet concluded that there will be a flow of capital that will allow the Argentine economy to be expensive in dollars and sustainable over time with this productivity level.

-What is “energy drunk”? Dead Cow?

-A drunkenness of expectations that the Government promotes and that the financial market follows closely. The numbers from companies and specialists are all very similar, they say that by 2030 with an optimistic scenario there will be about US$ 30,000 million in energy exports and with a little more optimism another US$ 20,000 million in mining. In total, US$ 50,000 million in energy and mining exports per year, which would be US$ 1,000 in exports per inhabitant and would allow the country to go from exports of US$ 2,000 per inhabitant to US$ 3,000.

-It is not a small thing but it is not enough. If you look at other countries, Australia exports US$ 7,000 per inhabitant of energy and mining, Canada US$ 4,000 and Chile US$ 3,000 in mining alone. But Argentina starts from an underground with negative reserves of US$ 7,000 million, accumulated private sector commercial debts that it would have to pay at some point for US$ 20,000 million, debts for unpaid dividends of around US$ 8,000 million. And if you want to go to a currency competition, what does the IMF say? Peru or Uruguay have between 20% and 30% of GDP in reserves, meaning that Argentina would need between US$60,000 million and US$180,000 million in reserves. And all this without taking into account what will happen when the economy grows and has no stocks: in 2017 at today’s prices, families demanded US$40,000 million for tourism and savings. That is why we should not get drunk with the fact that this time is different: the cheap dollar like this is not sustainable.

-And what is the solution? Devalue?

-Argentina is going to need years of surpluses in the current account to generate those dollars and also capital inflows. All of that requires a higher dollar.

-But the Government does not want that and announced that it will lower the rate of depreciation, taking the crawl rate from 2% to 1% to lower inflation even further.

-The Government not only denies the problem, but also seems to be on the way to exacerbating it. The decision to go from the 2% crawl to 1% monthly in January or February will generate an additional delay in the exchange rate. Sooner rather than later it’s going to be a problem. We’ll see what the IMF says.

-Raising the dollar would mean increasing the monthly inflation rate to what level?

-It depends on what type of correction is made and what you want to make. Don’t know. But of course the transfer to prices would not be the same as last year because we are in an economy that functions in a more normal, competitive way, with greater commercial openness and where the transfer to prices will be more difficult.

-This week it was learned that poverty would end this year below the previous government. But if the dollar rises it would increase and there will be a decline in this matter.

-This is the risk that this strategy has.

-Which: the Government’s or yours to go to a higher dollar?

-That of the Government. What I am saying is that with a higher exchange rate the reduction in poverty would be slower than the Government would like but the strategy would have fewer risks because my point is that at the moment I do not see a flow of capital available to finance that the dollar in Argentina remains at current levels and the economy grows sustainably at 3% or 4% for the next five years. On the other hand, there is evidence that a high exchange rate generates growth in employment. It is a matter of distinguishing short and medium term effects.

-But financial euphoria exists and is there. The country risk ends the year at the levels of early 2019.

-Well, I wonder why. The markets see a very optimistic scenario when there are so many other questions going around. If Cristina Kirchner is a cuckoo for the markets, are you already sure that Kirchnerism is over?

-What would be the best monetary regime to which the Argentine economy could migrate?

-The ideal would be to move towards a managed floating exchange rate like Chile or Peru. But for that it would perhaps have been better to lower inflation more slowly to have more external robustness, a central bank with more dollars and a less appreciated exchange rate.

-What can be expected from the agreement with the IMF next year?

-The agreement with the IMF has a point of tension. For the first time in history the size of the fiscal adjustment is not a problem. The Government imposed a deficit correction goal on itself that was much higher than what was asked of it. The only source of conflict would be the monetary-exchange scheme. The Fund is willing to give money to the Government but since the destination of that money would not be to cover the fiscal deficit because it has already been corrected but rather to improve the reserves, the IMF will want the Government to make the stocks more flexible and give more freedom to the dollar . There should be some exchange rate float for the Fund.

Martín Rapetti is the author, together with Gabriel Palazzo and Joaquín Waldman, of a work that developed a database with 46 stabilization plans in 18 Latin American countries between 1970-2020, classified into three categories: failures, transitory successes and lasting successes. “Stabilization plans: Evidence from Latin America” is the title.

-From the evidence of the past, what usually goes wrong in stabilization programs?

-There is no plan in which inflation will decrease without the exchange rate being delayed. The exchange rate always lags behind the rest of the prices and hence the definition of anchor. There are programs that do not manage to stabilize even at the beginning and there are others that have initial success and that after a while they turn around because we must begin to correct that delay that occurred at the initial moment of stabilization. When does this correction begin? ? When the dollar account starts to fail.

-Many times politicians stop doing their homework when they get the first low inflation data and perhaps that is a mistake because it is a starting point to continue…

-That happens a lot and that’s what a member of the Plan Austral economic team told me. [N.E.: el programa de estabilización lanzado en junio de 1985 durante el gobierno de Raúl Alfonsín]. Countries that start with orderly public accounts have a better chance of stabilizing because as they do not have to issue to generate either external debt or monetary issue, the balance of the exchange market is more guaranteed and they are not pressuring it with issue. If you start from a very low exchange rate, you will fall even further behind and end up with a ridiculously low dollar that sooner or later will have to be corrected. In my opinion the latter is the current problem.

-What is the key to success?

-Argentina can only have this cheap exchange rate if there is a huge productivity reform and that takes time. I would be very surprised to see that within three years the exchange rate without stocks continued to appreciate and was 10% lower in real terms or 15% lower.

-There is a lot of talk about stabilization and less about destabilization. Isn’t Argentina an almost unique case of destabilization in the 2000s?

-If you stop in 2005 and look at the bulk of Latin America, you see all the countries with reserves, low inflation and floating exchange rates. At that time the region was divided into two groups: one that adopted good macroeconomic practices and another that did not. Brazil, Chile, Colombia and Uruguay were the first. Argentina, Ecuador and Venezuela were the last.

A project: Finish the book I am writing with Pablo Gerchunoff

A dream: Be part of a government that develops Argentina

A memory: The birth of my two children

A leader: Diego Maradona

Food: Salta empanadas

Drink: Polígonos Gualtallary Malbec by Zuccardi

Book: Adán Buenosayres by Leopoldo Marechal

Person you admire: Gustavo Cerati

A site: Sit with Julia and watch a movie

Movie: Pulp Fiction by Quentin Tarantino

Serie: A rooster for Aesculapius by Bruno Stagnaro