Bicycling a bubble
The combination of the highly successful conclusion of the tax whitewash on the last day of March and the spontaneous pro-government marches on the first day of April seems to have impressed the Mauricio Macri administration as something of a turning-point following the mostly downhill trends so far this year, imbuing them with optimism for the rest of 2017, but they might well find themselves wondering whether the first of these successes at least was so entirely positive after all. This is because the current combination of interest and exchange rates create almost optimal conditions for a “bicycle” within the financial sector so that given the vast influx of whitewash capital to fuel this mechanism, it might well mean that the 2017 real growth which had seemed so inevitable last year (if only as a rebound from a dismally recessive 2016) will be replaced by a huge speculative bubble.
Interest rates which have recently risen from 20 to 26 percent (with more to come) when the official inflation forecast for this year remains below three-quarters of the latter percentage cannot be described as growth-friendly, at least not for the productive sector, yet from a strictly monetary viewpoint the government has little choice. The steep increases in gas and electricity billing early this year (better now than just before the October midterms, according to any electoral strategy) have caused the cost of living to spike again following a slowdown in the second half of 2016 so that the high interest rates become necessary in order to counter this inflation (the real enemy of growth, according to the Macri government’s economic logic) — going easier on the subsidy cuts is not considered an option because trimming the fiscal deficit is viewed as also vital against inflation. Yet a dollar closer to 15 than 16 pesos (the inevitable consequence of financing the fiscal deficit by borrowing abroad rather than making major cuts and now due to be compounded by fresh mega-supplies of greenbacks from the whitewash and the harvest) makes for huge profit margins when switching between the two currencies, especially in the absence of currency controls — and here again the government finds itself with little margin since the removal of those controls is seen as key to winning the confidence of overseas investors such as those attending last week’s World Economic Forum Latam in large numbers.
There is thus a very real danger of incoming money taking the form of fly-by-night capital seeking purely financial gains rather than the more productive investment which might lead to job creation (not even the real estate which is so often the refuge for surplus cash in Argentina) so that by the end of the year the Macri government might well be asking itself how so much money could lead to so little growth.