Even more than growth, Mauricio Macri’s government has made the reduction of inflation its main economic banner. This is a key objective to straighten out the economy once and for all, and the return of credit and investment depends on it. However, because of its short-term side-effects, it is hardly compatible with the electoral needs of an administration which needs to strengthen its parliamentary position and re-legitimise its programme before facing the mother of all battles — the tough fiscal adjustment that, inexorably, is coming.
With just over six months to go before the October 22 legislative elections, the heterodoxy of confronting them with tight monetary policy became more pronounced in recent days as the economy delivered unexpectedly bad news.
It’s not that there are no “green shoots”. There really are. They are in agricultural business, which is heading to complete a very successful harvest; in the increased sales of cars and motorcycles; in the surge on the real estate market; in an incipient revival of mortgage schemes; in the return of public works; and in a halt of job destruction. But this is a fragile and uneven recovery, leaving industry behind, and which does not translate into a recovery of consumption, an unavoidable variable given that it accounts for almost 75 percent of Gross Domestic Product.
The bad news then came, strikingly, from the top priority — inflation. In fact, the official March index was 2.4 percent, with the special incidence of items such as electricity and others less obvious, such as education, garments and food and beverages, all above average. On the other hand, core inflation, which excludes seasonal products and regulated prices, advanced by 1.8 percent. An index at odds with the Central Bank’s 12-17 percent inflation target.
Now, the authorities expect to keep inflation under control in a 20-22 percent range, more compatible with a level of activity that cannot be trampled anymore. The Macri government expects prices to slow down as from May, but it is well known that after the election, there will be new adjustments in electricity, gas and water billing that will mount renewed pressure.
Central Bank Governor Federico Sturzenegger’s reflex was to raise the benchmark interest rate by 150 basic points to 26.25 percent. The measure caused surprise in part of Macri’s cabinet, but was defended by Treasury Minister Nicolas Dujovne and praised by the market as a proof of the body’s independence.
The rate hike is not in itself as recessive as non-Argentine readers might think: credit in the country is limited so its impact is lower. Its negative effects in terms of economic activity must be sought in other aspects.
Firstly, because it makes financial activity more profitable than productive investments. In addition, the former does not pay some taxes and is not subject to the uncertainties, rules, charges and obligations of the latter. And profits come in the short term.
On the other hand, the specific financial operation arising from a rate hike is, in a context such as the present one (stability or even a downward trend in the exchange rate) the historical and harmful “bicycle.” This starts when local or foreign investors sell dollars, deposit pesos in the short term at high interest and finally return to the dollar, and then repeat the cycle or leave the system. This fattens or dries the Central Bank reserves out, depending on their will to to stay or retire. Nevertheless, while the “bicycle” works, it pushes the exchange rate down.
While investors are getting on their bikes, supply dominates in the exchange market. Additionally, the government postpones the fiscal adjustment and compensates the imbalance with debt issuance. Everything leads then to a greater exchange rate fall.
In this way, the industrial sector, the big loser of the Macri model, begins to make its complaints heard. The strategy that makes the fight against inflation excessively dependent on monetary policy, without a determined fiscal anchorage, unleashes a perfect storm — encouraging speculative investment over production, high financing costs, sustaining a high tax burden, deepening the exchange rate problem, an incipient opening of imports and a persistent drop in consumption. Industry today works with an idle capacity of 40 percent, a worrisome figure.
According to the Confederación Argentina de la Mediana Empresa (CAME), retail sales fell by 4.4 percent year-on-year in March, accumulating 3.7 percent retraction in the first quarter compared to the same period in 2016. It is expected that collective bargaining agreements will be reached in many sectors as from next month, which will bring some relief. But how much?
The consensus among economists that wages would rise above inflation in this election year was never more than a hypothesis, a capricious application of a past rule to the present. In fact, there is no indication that the government will allow wages to rise in real terms. It did not happen in private negotiations closed until now (except in the very special banking sector) or in the state. Otherwise we would not be bogged down as we are in the “battle” of María Eugenia Vidal and the teacher unions in Buenos Aires province.
The recovery of the economy was supposed to rest on the growth of the farm sector, on the large-scale return of public works and on an increased domestic demand. The first thing is happening. The second, too, but its visibility will take some time. The third, as we have seen, is just a matter of faith.
Just a rebound
Of course, the new wages will generate some relief in the population but it is necessary to correctly assess that rebound. It will describe a small upward spike within a long declining curve. The purchasing-power lost in 2016 will not be recovered and many activities will experience new setbacks.
Thus, the growth target of 3.5 percent for this year is now only the best of the possible scenarios, although already unlikely. Economists now start working with a range of 2-2.5 percent, barely enough to offset the fall of 2016.
What remains to be done by the government, in this context, in an election year? The manuals indicate that the “right” thing to do is to go to the polls by increasing spending, lowering interest rates, letting wages fly and pouring money into the economy. It is not what will happen. Macri has already said: “There is no Plan B.” And Labour Minister Jorge Triaca was even more explicit: “This government does not have in its agenda to return to the (Kirchnerite) model of (Axel) Kicillof and (Guillermo) Moreno.”
The Pink House has made a virtue of a necessity as it has found a new epic that, despite everything, it believes can lead to victory on October 22.
That discovery occurred on Saturday April 1, when tens of thousands of people occupied the Plaza de Mayo in Buenos Aires and mobilised in other cities in support of the ruling party. In “1-A” , summoned via social networks and aided by certain media, the pro-Macri masses imposed its views on his government: the lines that predominated were a strong anti-Kirchnerism and a demand for a harsh hand against the pickets and social and union protests.
The government reacted euphorically. Since that day, the official rhetoric has not stopped hardening. Macri himself endorsed the most profound prejudices of Argentine anti-Peronism by referring to “the buses and the choripanes.” The anti-union preaching became more aggressive, both with the Buenos Aires teachers and against what the President himself defined as “mafias.” Nobody explained why, when negotiating, the government continues to prefer the so-called “bureaucracy.”
On Thursday April 6, in the first national strike against the Macri administration, it went from words to deeds — for the first time the government ordered the security forces to dislodge the pickets mounted by sectors of the left. Border Guards cleared the Panamerican Highway without the feared excesses, as happened in some points of the city with the police. A public sympathetic with the April 1 movement applauded the restoration of order in public space.
Incarnating anti-Peronism and the role of the party of order became a new epic for Macri. One that allows the Pink House to approach the elections presenting itself as an administration harassed by destabilisers and anxious to break with the “old Argentina”. But enthusiasm carries dangers, as evidenced in the Palm Sunday violent eviction of the “itinerant school” in the Dos Congresos square. Macri’s request that teachers should stop strikes that hurt children to seek “creative” kinds of protest found a violent limit set by the police.
The Let’s Change ruling coalition showed fissures That is why it ended up rushing an authorisation of the “itinerant school” for a week. The UCR Radical party and the Civic Coalition offered a thunderous silence and only Macri’s Pro came out to justify the repression. The arguments revolved around a repression that had not been one, that the teachers were not teachers, that they had attacked the police and that they had not asked for permission to protest. Everything was curious. None of this was so and, according to the Misdemeanours Code, the protests require only a notification of and not a permit from the authorities.
It is true that mounting a tubular structure in a public place can be dangerous and that may require more than notification. But it was hilarious that the Environment and Public Space Ministry of the City argued that the police acted, among other things, to safeguard the physical integrity of the builders. The ways of caring for people are sometimes curious.
Argentines are accustomed to protest abusively. But cutting streets, freeways and routes are not exclusive to the pickets or the pauperised cooperatives. Farmers did so in 2008, the anti-K caceroleros, or those porteño neighbours whenever they undergo a prolonged power cut by Edesur or Edenor.
That also applies to the pro-Macri demonstrators of April 1, whose inorganic character evidently prevented them from asking for any authorisation to march, as they did, in the middle of the street. Should the restoration of the street order have begun by repressing the government’s own sympathisers? Of course not. Ordering the public space will take time and, given the poor background of our security forces, it would be desirable to follow paths closer to persuasion than to force.
Will it be enough for Macrism to embody old anti-Peronist Argentina and to enforce law and order to win on 22 October?
The government says that, according to its surveys, more than 60 percent of Argentines reject strikes and support the liberation of public space.
By the way, it is true that there is an outcry, especially in the upper-middle class, for order in public spaces which has not ceased to be disheartened from the 2001 crisis. It is also possible that this is a claim of a majority. However, the murky professionalism of the Argentine security forces is well-known and the same middle-class people who ask today for law and order tomorrow may well reproach excesses. What happened to teachers was on the very edge — they belong to a middle-class sector who largely voted for Macri in the elections of October and November 2015.
Macri had promised to reduce the “chasm,” but he does nothing other than deepen it. Will that road be effective when there are still six months to go before the mid-term elections? It is necessary to see if it is easy to mobilise society for so long with a discourse as confrontational as the recent one, especially after 12 years of similar action, although in the opposite direction, tried by Cristina Fernández de Kirchner.
Finally, and more importantly, whom does Macri address in this way? To the majority of society, as the government says, or just to its hard core, the third which voted for Macri in the first round of 2015?
So, are we about to contemplate the unprecedented fact of a government winning an election with the economy playing against it?
The outcome of the election year depends — to a large extent — on the answers to these questions. What a divided opposition does will also affect the result, of course.
Macri may catch up with his third, but the bet is risky. As much as the prize or punishment which still lies hidden in the future.