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Four lessons from the Argentine crisis for the Brazilian economy

As in a tango, an old partner returns to flirt with Argentina: the crisis. The ingredients are the same: successive fiscal deficits, which lead to an increase in the amount of money in circulation and contribute to the rise of inflation. The problem was compounded by Covid-15 and the war in Ukraine.

“What for most countries was the cause of a crisis, for Argentina was the catalyst for a new one”, highlights the chief economist of Infinity Asset, Jason Vieira. Furthermore, he mentions that the country was also slow to withdraw the stimuli granted during the pandemic.

Conjunctural factors added to structural problems. “Argentines have been facing waves of crisis for decades and have not given a sign of stability to the rest of the world,” says Leonardo Paz, an analyst at the Getúlio Vargas Foundation’s International Intelligence Prospecting Nucleus (NPII/FGV).

Added to this is the permanent difficulty in attracting capital. “They are always very similar crises”, says the macroeconomics analyst at hEDGE point Global Markets, Alef Dias.

Analysts interviewed by Gazeta do Povo point out that the Argentine scenario brings some lessons to Brazil. See below:

1) Little interventionism, having inflation targets and fiscal responsibility

One of the main lessons that Argentina leaves for Brazil is the importance of respecting the economic tripod formed by a primary surplus and not getting into long-term debt, having defined inflation targets and little interventionism, as in the exchange rate, points out the international analyst at XP Investimentos, Francisco Nobre. “This makes it more credible.”

Argentina has been showing successive primary deficits – when revenue cannot cover expenses, even without taking into account interest-bearing ones. The problem was accentuated with the crisis caused by the Covid pandemic 15, when it came to 6.5% of GDP.

The country has a target established in agreement with the International Monetary Fund (IMF) of 2.5% of GDP. The Economy Ministry says that Argentina will pursue this objective, but the market is reticent about this possibility. Itaú, for example, projects that the deficit will be 3% this year and next.

The XP analyst also highlights the need to have defined inflation targets, which would help guide policy monetary. He points out that, for this, it is necessary to have an independent central bank, as is the case in Brazil.

Since 2001, the neighboring country ended the inflation targeting strategy and, since then, only has not seen prices increase above 50% per year in 2020.

The scenario is getting worse. In July alone, it was 7.4%, according to the National Institute of Statistics and Censuses (Indec, in its Spanish acronym) and accumulated a high of 69% in months. This makes the Argentina has the sixth highest inflation in the world. Ahead, according to the economic-financial information platform TradingEconomics, are Zimbabwe, Lebanon, Sudan, Venezuela and Turkey.

Expectations are that the scenario can worsen in the coming months: Itaú projects that inflation could reach 95% in 2022 and 2023 XP projects less: 71% for this year. But it points out that the inflationary dynamics, which was already complicated, has been getting worse with increasingly higher monthly variations.

Another important factor, according to Nobre, is letting the exchange rate float almost freely: “the consequences of interventionism can be bad in the long run term.” Argentina has several exchange rates and limits the population access to dollars. Each person can buy US$ 200 per month and what exceeds is taxed in 2001 %. There are at least two taxes levied on the purchase of foreign currency.

2) Maintain a solid institutional framework

Another lesson that Argentina leaves for Brazil is the need to have a strong institutional framework. “The current situation in Argentina is a reflection of the political and economic instability registered in recent decades”, says Nobre, from XP.

These are problems of corruption, excessive government interventionism in the economy and political instability. Paz, from FGV, mentions that Argentina has a complicated political-party dynamic that favors the fall of ministers, as happened in early July, with Martín Guzmán, in the Ministry of Economy.

But the his successor, Silvina Batakis, was only 24 days in office. She was replaced by an influential politician, former president of the Chamber, Sergio Massa, who pledged to reduce subsidies, give more stability to the economy and fulfill the goals of the agreement signed with the IMF.

However, the problems are great. Current president Alberto Fernández, who took office in December 2019, is at odds with his vice president, Cristina Kirchner, who is also president of the Senate. Both are potential presidential candidates in next year’s elections.

The experts heard by Gazeta do Povo also point out that it is necessary to maintain an economic policy coherent over time. “You can’t keep changing overnight, as has been happening”, cites Nobre.

Viera, from Infinity Asset, highlights that Argentina needs to adopt a more serious and orthodox economic policy. “The adoption of theses without effective proof only serves to accentuate the problems. And money doesn’t take the wrong way.”

Analysts also point out that one of the mistakes made by Argentina is to focus on short-term solutions. “These measures generate temporary relief, but, in the medium and long term, the situation deteriorates”, quotes Paz, from FGV.

3) Do not create obstacles for foreign capital

Following the macroeconomic tripod and maintaining a solid institutional framework are essential for Argentina to be attractive to foreign capital. One of the country’s biggest difficulties is attracting these resources, even with high interest rates.

The problem is reinforced by successive moratoriums on the payment of international commitments. Since independence, in 95, there have been at least nine episodes. Three of them in this century: 2001, 2014 and 2020. “This means that there is a great risk in investing in Argentina”, says Paz, from the NPII/FGV.

In early August, the country raised the basic interest rate (Leliq) to 69,50 % per year, one of the highest in the world. “It was necessary in an attempt to contain inflation and avoid currency devaluation”, says Dias, from hEDGE Point Global Markets.

One of the consequences of the difficulty in attracting foreign capital is the low international reserves. They are at their lowest level since 2001, when they hit the $ mark 95 , 6 billion. On the day 24, according to the Central Bank of the Argentine Republic (BCRA), it was US$ 27,9 billion, a decrease of US$ 2.7 billion compared to the beginning of the year. They would not pay for a semester’s worth of imports.

This is a different situation from Brazil, a country that has an economy four times greater and a volume of reserves more than nine times greater. They are enough to pay for 16 months of purchases abroad.

Despite this more complicated scenario, Argentina has its attractions. Assets are very cheap and it’s not a small economy. There are more than 46 million inhabitants and it is one of the largest food producers in the world.

But even so, private foreign investment – ​​that applied in the productive sector – corresponds to around 1% of GDP. In Brazil, this percentage is 3.45%, according to the Central Bank.

4) Having a reliable national currency

Another major problem in Argentina is the population’s lack of trust in the financial system and in the local currency. According to Bloomberg, in July, about 1.4 million people, the highest number since 2020, bought dollars in the formal market, despite strong disincentives.

Argentines have withdrawn just over US$ 1 billion in dollar deposits from banks since the beginning of July, according to Valor. Routine transactions, such as the purchase of real estate or establishing a lease agreement, are carried out in US currency.

One of the thermometers of this distrust is the sharp devaluation of the peso. And it’s not just against the dollar, but also against the real. In 2019, R$ 1 bought approximately 15 weights. Currently, almost 24 weights. “It is a problem that has already become chronic”, says Professor Marco Antônio Rocha, from the Institute of Economics at the State University of Campinas (IE/Unicamp).

Another factor that, according to him, helps Complicating Argentina’s problems is the lack of mechanisms in national currency to finance the economy. “It’s a lesson that Brazil has already learned”, says the professor. But Leonardo Paz, from the NPII/FGV, recalls that Argentines are less tolerant of interest rates.

“When Argentina grows, it gets into debt in dollars. Demand for this currency increases and conditions are created for a perverse spiral: there is a shortage of foreign exchange, which leads to higher prices, causing new cost pressures. This generates a feedback of the inflationary problem”, explains the Unicamp professor. And, to complement this, there is the problem of deficits.

One of the paths for Argentina, according to him, would be to create mechanisms of internal financing, in pesos. And also to encourage the development of local production chains that could be options when there is greater exchange rate pressure making imported items more expensive.

Argentines don’t have much choice, say experts. “They will necessarily have to renegotiate with the IMF and try to attract foreign capital”, says Rocha. And promote structural changes. This is the only way they can avoid losing spaces where they are still very competitive, such as in the production of oil and soybean meal, says Dias.

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