Is It Time to Cry For Argentina?

Well it's taken a while to happen but the moment has been reached. Not since the dark days of 2001 has Argentine inflation been stronger than Argentine growth, but this is the year it happens.

The implication is negative real growth. The growth numbers still look stunning but they are coming at a price. The January CPI came in at 1.1% and there is little sign of moderation so we can safely annualise this number and come up with inflation that will be nigh on 13% in the current year. Growth even at a brisk 7% isn't even vaguely keeping pace with this inflationary tendency. Not only isn't the trend being contained, there are simply no policies in place or being mooted to grapple with it. Browbeating supermarkets and service stations operators may have achieved something in these areas but it is purely artificial and doomed to fail. Meanwhile construction costs are romping at 20% per annum. Move over Manhattan!

So if inflation is running at this pace (and not surprising in view of the hothouse environment created by the artificially weak peso) then anything but stellar growth is just going to be a case of standing still. With the robust fiscal and trade situation the easy solution is a currency move that puts some pressure on those that are using the shelter of the weak currency to feather their own nests. It's interesting to note that inflation hotspots are in non-tradeables like construction costs, private medicine and tourism. The first can be controlled by tighter credit, the second is a malaise of the upper economic strata and the latter is a product of the weak peso.

We are not suggesting that any of these areas is so fragile that a currency move or tighter credit would create a slump. There has been a remarkable tolerance for higher than normal inflation in recent years (which is always the start of a slippery slide in Argentina). It is now way out of line with international norms. Moreover at official levels the problems is treated with blithe regard. The attempts to railroad some producers into price freezes is more directed towards keeping hard-hit consumers happy (particularly pensioners on frozen incomes under the Scrooge-like Kirchner social security policies) then fighting inflation.

Now investors are starting to get spooked that maybe the government just doesn't care. That might be a good assumption if one presumes that Kirchner is not personally interested in re-election and at best is out stumping for his wife. To put the brakes on the economy at this point might damage her chances and give ammunition to the economically articulate forces of Lavagna (though the inflation is really just a consequence of Lavagna policies over the long haul).

As if current inflation isn't bad enough now a scandal is brewing that the number may actually be artificially suppressed to save the government money on its inflation linked bonds. Frankly we wonder why Latin governments hadn't thought of this before. Isn't that what US inflation statistics have been doing for years? Everyone knows US inflation has been way higher than indices might suggest. Keep those TIPS in line. But back at the fort, a head has rolled as an offsider to Economics Minister Miceli has bitten the dust for having the temerity to call the numbers rigged. With 40% of Federal debt paper linked to the inflation measure there are pretty powerful reasons to understate official inflation.

Economists have suggested that the January numbers might have been 1% higher if not for the "massaging" due to stronger private medicine and tourism costs. We have debunked private medicine before as not too relevant to the lumpen proletariat but the hiding of tourist costs figures as the overheated tourist boom is ripe for price gouging. Just as the construction boom is clearly engendering structural inflation. As we have long noted a key tool is the exchange rate. Kirchner has to grasp the nettle now or he may have a situation by election day that may make him wish he had take the high road of tighter policy earlier on, instead of going with economic gemütlichkeit.

Comments

[john gaats:]

what is your opinion of METROGAS SA (MGS)? It is listed here as a "Foreign Utility". How will inflation and politics impact on it?

2007 Feb 12 10:46 AM