Yesterday, Economy Minister Axel Kicillof presented the 2016 budget to Congress. In it, he denied that Argentina would devalue the peso in 2016.
Argentina faces a truly different international environment in 2016 than in 2015. Argentina’s main source of foreign currency is via exporting. The country exports commodities (soy, soy derivatives and corn) and also automobiles and trucks. Global prices of commodities have collapsed in the last year. Auto prices haven’t fallen so much, but Argentina’s main destination for exported cars is Brazil. And Brazil’s currency, the real, has depreciated more than 40% against the dollar this year so far, meaning Brazilians won’t be able to afford quite so many Chevrolet Agiles. As the Agile has been rated “totally unsafe” for adults, scoring zero stars, this might not be quite such a bad thing for them.
Even leaving aside Argentina’s domestic economic problems, it is still facing external factors that should imply some internal budgetary changes. Instead of acknowledging these factors, Kicillof took a page out of President Cristina Fernández de Kirchner’s book and blamed some combination between the rich and US dollars.
“A devaluation does not imply that a producer could sell more pears, but a millionaire with dollars wants a devaluation of 96% to get rich in a day,”
This leads me to suspect that Kicillof likely did not actually attend his Economics courses at the University of Buenos Aires, because a devaluation of the Argentine peso would indeed permit a pear producer to sell more pears. A devaluation of 96% would also not be favorable to a millionaire, because while his dollars would indeed become more valuable with a one-day 96% devaluation, such an abrupt change in exchange rates in a floating exchange rate regime would plunge a country into such pandemonium and distress that he’d likely prefer to take his dollars and family out of the country than enjoy his increased purchasing power of medialunas. Although he might buy some of that other guy’s pears.
This year, the budget predicts the following:
- Average exchange rate of 10.60 ARS/USD, increasing to 11.20 ARS/USD in December
- GDP increase of 3%
- Inflation of 14.5%
- Budget surplus of AR$4 billion
Last year’s 2015 budget predicted the following:
- Exchange rate of 9.70 ARS/USD
- GDP increase of 2.3%
- Inflation of 15.4%
So according to Kicillof, even though external conditions have worsened, next year the economy is going to grow more and experience less inflation. Also the government will neither change tariff policies nor cut subsidies.
Kicillof also neglected to mention two central issues that expire at the end of 2015: emergency Económica, which gives the government the power to make economic decisions without Congressional approval, and the tax on bank activity known as the impuesto al cheque.
Given the market similarities between last year’s budget and this newly presented budget, I think it’s fairly likely that Kicillof employed a tactic practiced by sixth graders worldwide and simply copy/pasted last year’s budget with a few changes so his teachers wouldn’t notice.