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Argentina’s inflation nears highest level in three decades

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Via Financial Times

Argentina’s inflation rate hit 53.8 per cent in 2019, climbing to its highest level in almost three decades and underlining the scale of the challenges facing the embattled country’s new leftist president, Alberto Fernández

The national statistics agency announced on Wednesday that prices rose 3.7 per cent in December after renewed currency volatility ahead of elections last year, confirming Argentina’s place among the top five countries with the highest inflation rates in the world — behind Venezuela, Zimbabwe, South Sudan and Sudan. 

Even so, Argentina’s Peronist government faces the even more urgent task of staving off the country’s ninth sovereign debt default as negotiations heat up ahead of a self-imposed deadline to come to an agreement with creditors by the end of March, given heavy obligations coming due in the following weeks. 

The government of the province of Buenos Aires, Argentina’s largest, on Tuesday announced that it would delay a payment for $250m due on January 26 until May 1, after the national government confirmed that it would not bail out the province. That has triggered concerns that a provincial default could contaminate national negotiations. 

“If they don’t fix the debt situation, it will be very difficult to stabilise [inflation],” said Marina dal Poggetto, executive director of EcoGo, an economic consultancy in Buenos Aires, who worries that time is running out. “If they don’t make it to March [with a deal], their whole economic plan could start to wobble. They can’t keep burning through central bank reserves . . . Everything is going more slowly than one would like.” 

Generalised frustration with the slow progress in negotiations with bondholders contrasts with concerns that the central bank may be moving too fast in lowering interest rates in an attempt to ease the impact of a third consecutive year of recession. 

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Loosening monetary policy without having a clear fiscal plan or winning over the confidence of Argentine businesses and consumers is a mistake, said Marcos Buscaglia, an Argentine economist. He pointed to the fact that in January bank deposits in dollars have fallen by about $40m a day, having risen at the end of last year — a clear sign that savers are worried. 

Argentina’s 2019 inflation figure was the highest rate recorded in South America’s second-largest economy since 1991, when inflation reached 84 per cent as the country was coming out of a hyperinflation crisis that toppled its first democratic government after a 1976-83 dictatorship. 

It represents a damning indictment of the former government of President Mauricio Macri, who came to power promising that it would be easy to quash inflation that was then about half today’s levels. Despite one of the tightest monetary programmes in Argentina’s history implemented in late 2018 after a currency crisis, it has failed to reduce inflation and only deepened the country’s recession. 

Officials hope that inflation will now start to decline thanks to various measures that include the freezing of tariffs on public services and strict currency controls that have returned stability to the peso since late October. 

The government is understood to be content with lowering inflation to about 40 per cent this year, although everything will depend on the successful resolution of the debt crisis. 

“They’re putting all their chips on resolving the debt situation in the first quarter. It’s not going to be easy, but it is possible,” said Javier Alvaredo, director of ACM, a local economic consultancy. “It would be a great achievement if they manage to avoid a default and normalise the debt situation.” 

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If the restructuring is successful, and there is an economic rebound that leads to greater tax revenue, it will be key to see what the government does with the additional funds, said Mr Alvaredo. “If they are used to strengthen the fiscal situation, it could be a powerful signal in terms of inflation . . . but if spending just increases, that would be harmful for inflation.” 

Worse still, if Argentina ends up defaulting on its debt, then inflation would be likely to deteriorate even further this year, he added.

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