Inflation: Argentina is a bad student, but should we imitate Brazil?

By Francis Rinaldi / frinaldi@lanueva.com

That Argentina is one of the countries in the region with the worst inflationary performance is nothing new. But strictly imitating what the neighbors do may not always be the solution, since the abrupt rise in interest rates left Brazilians with a level of indebtedness in local currency even above that of our country, a serious risk that would be convenient avoid, as Jorge Vasconcelos, an economist from the Mediterranean Foundation, explained to this newspaper.

It is that the domestic debt (debt in local currency), as a percentage of the GDP of our most important neighbor is 67.8%, well above the Argentine 39.4%, according to the analyst’s estimates for the current year. In fiscal matters, the average deficit for the 2014-2018 stage was also higher than the local one: 5% for our country versus 7.8% for Cariocas.

However, the inflationary course is also very different: while for these lands a rise in prices very close to 100% year-on-year is discounted at the end of the year, in Brazil they would not exceed 6% for the same period, that is, less than what we have come to have here in a month.

“Brazil chose the path of very high interest rates to combat inflation, but, except for a few stages, it maintained a persistent fiscal deficit, which generated a larger domestic debt than that of Argentina, which is undoubtedly a risk”, Vasconcelos warned.

So which way to go? “First of all, have fiscal and monetary policies that are designed to stabilize the economy and what are called solid anchors, which can be to set public spending, emissions or the exchange rate. Business and union agreements can also contribute. The other thing is to try to deindex the economy, because all the contracts that are signed today have a very high inflation as a horizon, which is not a good thing. That from the technical. And from the political point of view, it is essential to maintain it over time.”

The figures of the National Budget, which estimate a drop in global public spending of 1.2% in real terms, according to private calculations, seem to confirm the change of course of a Government that systematically denied the need to keep the accounts balanced to avoid problems of debt or inflation, despite the highly objectionable cuts in fundamental items, such as Education, since a real reduction of 14% is expected in current transfers, among which is financing for universities.

“I believe that the Government opted for a 2022 with an inflation of the order of 50%, not very different from that of previous years. That and the Covid, made it continue to finance the deficit with issuance, but this year, unlike 2021, people want to get rid of the pesos faster and faster, that is, the demand for money fell, and that accelerated it dangerously. And obviously, any adjustment that you want to make in this context requires a greater effort, because it is not the same to update rates with an inflation of 50 than with one of 100”, Vasconcelos pointed out to close.

Inflation: Argentina is a bad student, but should we imitate Brazil?