From bad to worse

Hyperinflation looms in Argentina.

Double-digit inflation is nothing new in Latin America’s third-largest economy but a rate of 58% by April of this year is Argentina’s steepest since January 1992. Last month, Argentina’s president Alberto Fernández (“Fernández”) raised export taxes or retenciones for the agricultural industry, one of the country’s most important economic sectors. This is just one of a several increasingly interventionist measures being taken by an administration desperate to control record inflation and keep prices stable amidst a deteriorating political situation. Such interventions will affect entire supply chain ecosystems.  

The chief economist of a macroeconomic consultancy explained, “There is broad consensus among those familiar with Argentina’s economy that an inflation rate of 70% is entirely feasible by the end of this year. It will be very difficult at this point for the number to be less than that by the end of the year. From then on it is difficult to say because at those levels one goes from 70% to 80% almost without realising it.”

“There is broad consensus … that an inflation rate of 70% is entirely feasible by the end of this year… at those levels one goes from 70% to 80% almost without realising it.”

The chief economist of a macroeconomic consultancy, Argentina

This latest agricultural export measure raises the export rate for wheat and soy related goods from 31% to 33%. More broadly, Argentina’s inflationary environment has been significantly affected by the sustained rise in food prices, driven by the conflict in Ukraine. Naturally, export taxes do boost government revenues and they can help to keep domestic prices stable but in doing so they can also cause price distortions across the economy at a time when Argentina is being watched like a hawk by the IMF with which it recently renegotiated eye-watering debt obligations.  

What are the chances for hyperinflation? A former public official and macroeconomic expert believes things are bad but not quite that bad (yet), “I do not see that the conditions for hyperinflation are in place, as we experienced a few decades ago. But there is a 3-digit inflation scenario. Although today we are seeing something close to 75%, if the macro scenario, and even the political one, is not tidied up a bit, going from 75% to 100% is not unthinkable.”

“I do not see that the conditions for hyperinflation are in place, as we experienced a few decades ago. But there is a 3-digit inflation scenario.”

A former public official and macroeconomic expert, Argentina 

Compared to the region, Argentina has a particularly high dependence on fuel imports further adding to inflationary woes. In May, the Central Bank (“BCRA”) raised rates by 200 bps to 49% signalling that the BCRA is serious about trying to contain inflation. However, increase to the minimum wage, pensions and social transfers indicate that inflation is unlikely to be bought under control anytime soon. Inflation is also eroding the value of the local currency forcing Argentines to carry large numbers of banknotes just to pay for basic items – this has increased rates of criminality.   

Political consensus will be needed to stabilise Argentina’s economy – lowering the fiscal deficit should be the priority. “With the political fragility that exists, not only at the government alliance level, but at all levels, I see it difficult for someone to take office in 2023 with a level of support that in itself allows them to carry out all the reforms that are necessary by themselves,” explains the chief economist. Ultimately, increasing food prices will be perceived as political suicide for an administration facing record low approval ratings, expect further regulatory intervention.  

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