‘It would be good for the country if the government had a bad election, come November’
From the United States, Domingo Felipe Cavallo speaks of a “completely disorganised” Argentine economy. He points out that an opportunity to get on track could exist after the elections to the degree that society “gives a clear signal.”
The 74-year-old – a former economy minister, foreign minister, Central Bank governor and lawmaker – analyses the flickers of inflation in the United States, comparing it to Argentina’s stagflation and saying that hyperinflation could come before 2023. In a more immediate term attention should be paid to the gap between the official exchange rate and the ‘blue’ dollar, he warns.
On your blog you wrote: “The government has decided to use three electoral weapons which are very dangerous: increasing public spending, upping wages, pensions and other social benefits above inflation and holding down devaluation of the official exchange rate to just one percent monthly by using the reserves accumulated thanks to the trade surplus from the high soy prices and other exports to narrow the gap with the semi-free exchange rates (CCL and MEP), thus preventing the surge of the parallel dollar last September from being repeated before the elections.” And you continued by saying that market operators forecast that “the accumulated pressure will end up in an explosive devaluation.” What is your own forecast of what will happen?
I prefer not to forecast. I don’t want my forecasts to turn into self-fulfilling prophecies, given that many people pay attention to what I say. Maintaining stagflation without it spiralling into an explosive hyperinflation is something the government will be able to do, both this year and also possibly the next. I’m not very sure that they can succeed in avoiding hyperinflation before the 2023 elections.
This analysis lacks a very solid base, that’s my impression. My objections to the way the government handles the economy do not refer so much to the cyclical as to their economic organisation. Each decision they take means regressing from the progress of the 1990s, some of which was maintained in the following decades. Our economy is very badly oriented. Short of a major reorganisation of the economy, we shall not grow again – we will remain stagnant and with dollar inflation.
The economist Marina Dal Poggetto has warned that instead of buying dollars in the second half, the government will be obliged to sell them. Would that be the turningpoint forming the basis for market forecasts?
They surely will be selling instead of buying, that economist is right. But the danger is a run on the fixed-term deposits of the banking system towards the dollar. That would complicate the government’s life greatly. The Central Bank in that event would raise interest rates in a bid to control that situation but nobody is sure how that would work out and I would prefer not to make a very precise forecast.
There is concern among economic agents as to what could happen with the dollar. The Central Bank decides the official exchange rate. The blowout could occur in the free markets, especially the so-called ‘ blue.’ If people think that it suits them to take out their fixed-term deposits and buy dollars on the parallel market, that is a very dangerous run which the Central Bank will have to stop. The only way is by significantly raising interest rates.
Former Central Bank governor Juan Carlos Fábrega has forecast that after next November’s elections there will be a 15 to 20 percent devaluation of the official exchange rate. Does that seem reasonable to you?
If there is not a run after the elections, the government is going to have to explain what kind of economic policy will be followed. Adjustments of the official exchange rate cannot be ruled out. If things go badly [for them], which is something I hope happens because I think it would be good, they will be obliged to reshuffle the Cabinet. And we’d have to see what orientation is given to the economy.
Now poor Martín Guzmán has to manage the cyclical together with Central Bank governor Miguel Ángel Pesce without any clarity as to what economic organisation and horizons the president and the government have in mind. They debate in the face of the specific stances over determined issues which basically emerge from the Instituto Patria and the vice-president’s inner circle. If this continues to happen, the outlook would be very bad for Argentina.
If the government receives a strong signal that things are going wrong, it might just see itself obliged to shuffle the Cabinet and change its orientation but we don’t know what it will do.
Fábrega’s calculation is really pretty simple as the correction of a one percent monthly devaluation when there is three percent inflation, which would accumulate a lag of 15 to 20 percent by the end of the year, give or take.
Yes, but the best way of seeing whether there is a major exchange rate lag or not is to look at the lag. It also depends a lot on what is done with taxation. The more emphasis placed on export levies, the more significant the exchange rate lag will be. If export duties are corrected, the lag will not be so great. The exchange rate reflects the expectations as to fiscal and monetary management.
It’s not easy to talk about and measure the exchange rate lag in circumstances such as these.
“Each decision [the government] takes means regressing from the progress of the 1990s, some of which was maintained in the following decades. Our economy is very badly oriented.”
We must define the kind of economy towards which we are advancing. For example, if we move towards a free economy integrated with the world without capital or price controls, in that case the market will fix the exchange rate at a different level to the current disorganised economy.
What did you think when Cristina Fernández de Kirchner said that we have to face the problem of Argentina being a bi-monetary economy for once and for all? Could her thinking be evolving towards a form of convertibility for the country?
She is suggesting the prohibition of any kind of transaction, not only financial but also commercial and even the circulation of physical dollars. Given the way of thinking of those around her, I don’t believe they are thinking of clearing the use of the dollar as an alternative currency to the peso, the efficient bi-monetary model which Peru has, for example, and which Argentina also had with convertibility.
Argentina fixed the exchange rate while in Peru the bi-monetary model worked without a fixed exchange rate. They achieved exchange rate stability through good management of monetary and fiscal policy in that country.
With Argentina’s economic history, it would seem plausible that even with dollarisation, there would remain the suspicion that a president could order the confiscation of all dollars and their conversion into pesos from one day to the next.
The monetary system always falls integrally into the framework of the overall economic system. You cannot work on the monetary system independently of the other reforms. If in the 1990s we hadn’t advanced towards opening up the economy, eliminating export duties, deregulating, privatising and opening up many investment opportunities, we wouldn’t have achieved stability. Unfortunately those ground rules were afterwards reverted, a trend in our country. This has to do with Argentina’s political leadership.
You were Central Bank governor a year after an economy minister who became famous for the phrase: “He who bets on the dollar will lose out,” Lorenzo Sigaut, who created forward exchange cover for dollar debt after José Alfredo Martínez de Hoz and his ‘tablita’ (a sliding scale of pre-set foreign exchange guidelines). Shortly after you left, indeed many accuse you of that too, the new Central Bank governor decided to directly absorb all private debt (then US$17 billion) as public debt, broadly similar to the conversion of that debt into pesos in 2002. It seems that every now and then the Argentine private sector demands the conversion of their unpayable debts into pesos in order to liquidate them. (Former Central Bank governor) Federico Sturzenegger wrote an article in Perfil saying that the inflationary tax thus generated by the government was worth almost two percent of Gross Domestic Product in revenue. How does Argentina break out of that culture?
The idea that debts are finally not going to be paid is what leads to defaults every now and then on the foreign debt or dollars under foreign law – equally a megadevaluation with inflation rates very much higher than the previous to liquidate debts in pesos is a trend deeply rooted in the culture of all economic operators and also savers, which is why they run away from saving in pesos since they know that they’ll be the ones who finally end up paying the bill.
Going to a good monetary system with interest rates reflecting zero inflation expectations is essential but it has to be understood and accepted by the economic operators. That does not change overnight but only by persevering with the right ground rules. In the last years of convertibility due to the indiscipline of the public sector (basically the provinces) and also the desire of businessmen with dollar debts to unload them via their conversion into pesos and devaluation, we arrived at a climate of opinion, even among the political leadership, which produced the coup of 2001 and the absurd measures taken at the beginning of 2002.
“We must define the kind of economy towards which we are advancing. For example, if we move towards a free economy integrated with the world without capital or price controls, in that case the market will fix the exchange rate at a different level to the current disorganised economy.”
Juan Carlos Fábrega has praised Martín Guzmán’s fiscal discipline, saying: “He’s making the biggest squeeze he can but without saying so.” Do you agree?
There has been a fiscal adjustment but it is rooted in inflation and has accelerated inflation. That helped to increase revenue beyond the tax increases, which were a bad policy but still produced results. Like that change in the system for updating pensions, a total miscalculation on the part of the government, which believed that they were thus going to improve pensions when they have actually worsened them in real terms. The only thing which has been achieved by Guzmán’s fiscal adjustment is that wage increases in the public sector have not been as high as inflation. I do not see any structural adjustment really leading to any permanent reduction of public spending and the fiscal deficit. On the contrary, their initiatives are pointing towards ever more deficit. They talk of nationalising the Hidrovía waterway and possibly the private ports. That cloaks the idea of renationalising everything related to foreign trade logistics and foreign trade itself.
You only have to remember what the ports and the dredging works of the Paraná River were like when done by the Administración General de Puertos and all it cost to advance in privatisation to realise how absurd that approach is. It will imply very bad services, which will burden grain exporters.
In a lecture you gave recently at UCA Catholic University, you said that much of the increase in Argentine exports had to do not only with technological advantages and investment but also with being able to export via the Hidrovía and the improvements in the ports.
In the entire logistical system. Farmers will surely remember that until the reforms if the 1990s, what was paid to transport grain to the ports, what was paid for port services and then the river and maritime transport, all that, together with the inefficiency of the grain elevators and the rest of logístics, was a cost burden for producers, who also had to put up with export duties, thus earning less than half the value of their production on international markets. Much of that was corrected by privatising the ports, the Hidrovía, the grain elevators and the trains, facilitating greater efficiency and less logistical costs. All that ended up in more income for producers, permitting them to incorporate technology and invest, thus expanding agricultural frontiers. The grain harvest rose from 30 million to 130 million tons. All that now falls under a shadow. You only have to listen to the ideologues of these measures like Banco de la Nación director Claudio Lozano or [deputy] Fernanda Vallejos or Senator Jorge Taiana, who now unfortunately heads the Hidrovía system. One can only conclude that they wish to return to the pre1990 system. That is why farmers are manifesting their opposition, quite rightly. They have not yet made explicit what they have in mind but it is suggested by the stances of those persons. It reveals that we are moving in a very wrong direction.