Inflation and currency instability at the Central Bank have made Economy Minister Martín Guzmán accelerate his efforts to show a path of fiscal austerity, which he sees as an alternative to the disorderly devaluation that he wants to avoid.
Guzmán’s signals in this direction throughout the last few weeks have been multiple.
First, he confirmed that the government will be looking for an Extended Fund Facility agreement with the IMF, which could give Argentina four years of grace before needing to repay its debts with the Fund, in exchange for a series of economic reforms, the most important of which would be a fiscal adjustment roadmap to be followed in the three remaining years of Alberto Fernández’s presidency.
The minister also promised that next year’s fiscal deficit would be smaller than expected, down from 4.5 percent of GDP to between 3 and 3.5 percent.
Finally, Guzmán went on to show multiple ways in which the government would try to make the peso more attractive, with a series of fiscal cuts and monetary incentives, as we will see below.
The timing of these moves is partly explained by all the alarm bells that were ringing in Guzmán’s control panel.
The recently-published October inflation numbers showed that prices are accelerating, rising by 3.8 percent in the last month, the highest figure of 2020. This is explained by the massive money printing that the government resorted to finance its fiscal deficit expansion during the pandemic, and because importers’ have preemptively marked up their prices due to their belief in the growing likelihood of an accelerated devaluation.
The second alarm bell was that, despite the growing restrictions on imports, the Central Bank only managed to be a net buyer of foreign currency for a few weeks, and has been losing reserves again since the beginning of November, a path that is obviously unsustainable.
With this in mind, Guzmán decided to push ahead with some IMF-approved austerity signals, trying to show that he can cut down on deficit spending and money printing:
Slashing COVID spending
- First, there was the surprise elimination of the IFE emergency family stipend, created to protect the country’s most vulnerable people during the lockdown, and whose fourth installment was originally planned for October, then delayed, and ultimately cancelled. It was Economy Minister Martín Guzmán that pushed for eliminating the IFE, causing strong internal discussions in the cabinet, which Alberto Fernández ended up settling in favor of Guzmán amid the fear caused by the spike of the black-market exchange rate to almost 200 pesos per US dollar.
- The government is also looking to end the other big COVID-related addition to this year’s spending column of the budget: the ATP program that paid one fourth of employees’ salaries in companies affected by the lockdown. One month of the IFE program cost the State 90 billion pesos, while one month of the ATP program cost up to 40 billion pesos at the most stringent point of the lockdown. Together, these decisions mark the end of the “COVID spending” period that forced the government to print much more money than it had expected throughout 2020.
Pensions and public salaries
- Another big austerity signal was the change of the pension adjustment formula approved during Mauricio Macri’s administration, replaced by another one that doesn’t take inflation into account. Instead, Fernández’s formula will be derived from a combination of tax collection and the evolution of salaries, both of which have been going down in real terms throughout 2020. The new formula also states that pension hikes can never exceed the growth in the resources available to the ANSES social security agency by more than 3% in any given year. This point is central, as pensions comprise around 50 percent of public spending.
- Macri’s formula had already been suspended by Congress at the start of Fernández’s government, and the hikes by decree that took its place this year before the rollout of the new formula have only brought gains for those earning minimum pensions, while those at the middle or the top of the pension pyramid have lost out so far.
- Public employees’ salaries have also been hit by cuts during 2020, as their salary hikes were all comfortably below inflation throughout the year.
- Guzmán’s austerity program is also expected to include an unfreezing of the price of basic public services, to put the brakes on the rise in subsidy spending, particularly for electricity and gas, whose burden has grown significantly throughout this year. The exact steps that will be taken in this direction have not been decided yet, but a 35 percent hike in rates is expected for 2021, starting in January. This will inevitably add another hit on workers’ purchasing power, in an economy whose recovery is expected to be slow and with salaries already moving below inflation.
- Price controls in basic consumer goods are already being unfrozen as well, as companies’ complaints about being unable to cover their rising costs were piling up. With more than 2,500 products included in the government’s price control list, the risk of shortages would have started to become palpable if no turnaround was shown in this regard.
Raising interest rates
- Finally, the Central Bank is trying to get banks to offer higher rates to their clients for their fixed-term peso deposits, which have risen from 34 to 37 percent for small deposits (below ARS 1 million) and from 32 to 34 percent for bigger sums. The reasoning behind this is simple: get individuals and business to keep saving in pesos. But with 2021 inflation expected to be at 50 percent or more, this rates still look too low to achieve that, so it is likely that the rate hike will continue, with the credit risks that such a move entails.
A narrow path
Overall, the government is walking down a very narrow path. The budget cuts will definitely affect consumption, which small businesses were banking on in order to get their typical end-year sales boost after a difficult 2020. Parts of the ruling coalition are likely to demand an end-year bonus, but the government is thinking that it needs to cut down on money printing to stop the run against the peso, which also damages economic activity.