Analysis: Argentine inflation "resilient" despite slowing growth

BUENOS AIRES (Reuters) - Argentine dairy farmers dumped truckloads of milk in protests this week while millions of commuters endured the longest subway workers strike in history, all thanks to high inflation that is not seen easing despite a sharp economic slowdown.

A man walks past an electronic board showing currency exchange rates and an Argentine flag at a money exchange in Buenos Aires, June 1, 2012. REUTERS/Marcos Brindicci

The government shuns orthodox policies and spends heavily to stoke swift economic growth. Official data has drastically lowballed price rises since 2007 and President Cristina Fernandez avoids mentioning inflation, estimated at 20 percent to 25 percent a year - the highest rate in Latin America.

Her government has fined and even sued economists who publicize their inflation estimates, which tend to double or triple the official figure.

Dairy farmers are protesting to push for higher milk prices since they say they operate at a loss due to surging costs. Striking Buenos Aires subway workers initially demanded a 28 percent salary increase, along with better benefits.

“The cost of energy, fuel, veterinary products, feed - everything’s risen,” said Gustavo Colombero, the head of a dairy farmers’ association in Santa Fe province. “Smaller producers are on the verge of shutting down. Some people are already planning to auction off their herds and call it quits.”

In most of the last nine years, Argentina’s economy boomed at China-like rates. In 2012, however, increasingly pessimistic analysts are forecasting low growth or even a contraction.

When the economy screeched to a halt during the 2009 global crisis, inflation dropped along with demand. But this year it is not expected to budge due to high state spending, loose monetary policy, wage hikes, the impact of currency and import controls, unreliable data - and inertia.

Some economists say the country is already suffering from stagflation - stagnant growth and high inflation - while others dismiss that possibility because they foresee an economic rebound in the second half of the year and 2013.

While the situation cannot compare to the hyperinflation endured by Argentines in the past, it is still risky because it could end up erasing the gains made to boost jobs and reduce poverty since the devastating crisis in 2001-02.

Some provincial governments are already struggling to pay civil servant wages as tax revenue cools.

“In the short term, there’s less production and higher prices for all goods and services, which is the worst possible combination,” said Abel Viglione, an economist at Buenos Aires-based FIEL think tank. “Further down the line, recession with inflation halts investment and limits long-term growth.”


Argentina does not have an inflation-targeting regime and has no plans to implement one. Central bank chief Mercedes Marco del Pont says inflation should be fought by boosting supply through increased investment and production.

But the country’s allure to investors - already tainted by its reputation as a financial misfit after a massive 2002 sovereign default - is diminishing.

A virtual ban on foreign currency purchases, curbs on imports and new rules on export proceeds have hurt business and consumer confidence since Fernandez’s re-election in October. They have caused some shortages of goods and parts, a drop in real estate deals, and an overall decline in investment.

The government's seizure of a majority stake in energy company YPF YPFD.BA in May also rattled nerves.

Argentina now ranks No. 6 in foreign direct investment in the region even though it is the third-biggest economy. In the first half of this year, gross domestic investment shrank 9.6 percent as the purchase of imported capital goods plunged, consulting firm Orlando J. Ferreres & Associates reported.

Meanwhile, inflation expectations rose to 30 percent a year in March and have held firm since, private surveys show.

“There’s a problem with expectations and since the government does not talk about inflation or present it as a key economic policy priority, it becomes chronic,” said Rodrigo Alvarez, director of Analytica economic consultancy.

Fernandez’s administration is trying to sustain economic growth by stimulating demand, granting pension benefit increases and offering cheap credit to people who want to build a home.

But without additional investment, such programs could end up doing more harm than good.

“I don’t believe the stimulus measures will improve the level of economic activity and of course they’ll do nothing to lower inflation,” said economist and labor-market analyst Ernesto Kritz, head of CEL consultores.


Maintaining a competitive exchange rate was one of the pillars of economic policy under Nestor Kirchner, Fernandez’s late husband and predecessor as president. The central bank has allowed the peso to depreciate gradually over time - but it has lost its competitive edge due to inflation’s voracious pace.

Annual wage deals in the formal sector have topped inflation in recent years, which kept workers happy but raised costs for exporters who cannot pass along the increases to buyers abroad.

Kritz said companies agreed to wage hikes of about 24 percent this year on average, down from 31 percent in 2011. But this was still above the government’s initial 20 percent target.

“Our everyday reality is an increase in costs. The roughly 25 percent salary hike we give year after year, that’s the level (of inflation),” said Jose Ignacio De Mendiguren, head of top business group the Argentine Industrial Union (UIA).

The government has used price caps and grain export curbs to try to tame inflation. It has also held the exchange rate steady to anchor inflation since a currency devaluation would cause the price of imported goods to shoot up.

Last year, many Argentines speculated the government would allow the peso to depreciate at a faster pace after the October election. Capital flight surged as they snapped up dollars.

The government reacted by imposing new currency and capital controls, which they toughened in May by banning dollar purchases for the purpose of saving. This caused the spread between the official exchange rate and the black-market rate to widen to its current 36 percent.

“(The government) seems to be fixated on not having an official devaluation,” said Michael Henderson, an economist at London-based Capital Economics Ltd. “But a de facto devaluation is more or less taking place.”

Although currency trade volume on the black market is limited, the rate is still becoming a reference point for some transactions - which only serves to exacerbate inflation further.

“Our main concern is competitiveness. People know devaluing (the peso) is bad but you need to look at why we’ve gotten to this point,” De Mendiguren told foreign reporters this week.


Many economists say inflation will remain high because of the central bank’s heavy volume of money-printing, part of which ends up financing the government as its fiscal deficit widens.

The broad M2 measure of money supply grew 33.5 percent in 2011, official data shows. That tempo has cooled slightly but still showed a 31.5 percent year-on-year expansion in June.

In addition, state spending outstrips revenue growth and analysts see the first primary deficit in years.

A charter reform passed in March made it easier for the central bank to lend money to the Treasury and freed up the use of more foreign reserves to pay government debt. It also shifted its focus away from controlling inflation to boosting economic growth and employment.

Under the new charter, the central bank last month ordered that banks offer cheap credit for investment, especially to small- and medium-sized companies.

But company executives may be reluctant to invest when the rules of the game are in constant flux and growth is cooling fast due to internal factors, fallout from Europe’s debt crisis, and sluggish growth in top trade partner Brazil.

Argentina’s INDEC statistics institute reported annual inflation of 9.9 percent through July. But a Reuters poll estimated inflation was 1.8 percent in July alone.

Most analysts do not expect inflation to spin out of control, however. And today’s level is a far cry from the hyperinflation of the late 1980s, when prices exploded by as much as 5,000 percent annually.

“The macro economy is totally different, it’s not even comparable. There’s no likelihood at all of hyperinflation in Argentina,” said economist Arnaldo Bocco, a former central bank board member.

Additional reporting by Guido Nejamkis and Juliana Castilla; Editing by Phil Berlowitz