A macroeconomic report from Wall Street operators Goldman Sachs released Tuesday has warned that “without fiscal or monetary anchors” the country is up for strong “headwinds” in 2022 and 2023 and, therefore, “the peso needs to be devalued.”
The document also points to the accumulation of macro and financial imbalances, and focus on the evolution of the official dollar, the exchange rate gap and devaluation pressures, the rise in inflation and the recurring fiscal deficit that is financed through a monetary policy by the Central Bank which consists of printing more pesos.
The report also points out that there are growing micro distortions and an inefficient allocation of resources due to a set of controls on prices, labor, trade, the exchange rate and financial assets, combined with weak political credibility.
Goldman Sachs considered that an agreement with the International Monetary Fund to refinance short-term maturities (US $ 19,020 million in 2022 and US $ 19,270 million in 2023), continues to be “an open issue of difficult and uncertain resolution.”
In this scenario, Goldman Sachs projects a gloomy scenario for 2022. According to the bank's estimates, the local GDP will grow 9.9% this year (after the 9.9% collapse in 2020), but that growth rate will slow down “significantly” next year, when a 2.9% rise in GDP is expected, although it could be below those figures, due to macro and micro imbalances and relative price distortions.
The bank also expects inflation to stay high, after this years' projected 50% has an additional 10 points of suppressed inflation swept under the carpet through price controls and mismanaged utility rates.
“Inflation expectations are unanchored and the dynamics is highly inertial / persistent. We expect it to remain around 50% in 2022, due to the rapid expansion of domestic liquidity due to the
monetization of the fiscal deficit” in addition to a volatile exchange rate and price controls, which are “increasingly inefficient and unsustainable.”
Goldman Sachs' report was clear: the peso has to be devalued. The exchange rate gap of around 100% heralds a considerable devaluation which will bring the official exchange rate to at least AR $ 160 / US $ 1 by the end of 2022, which will nonetheless bring on very little relief if other measures are not taken at the same time.
The bank's document also warned that the fall in the fiscal deficit this year will be masked by the IMF's SDR (1% of GDP) and the wealth tax (0.6% of GDP). In that context, the primary fiscal balance is projected to expand in 2022, even if there is a modest adjustment, the report added.
Regarding the agreement with the IMF, the economists argue that a new program could lead to a path of fiscal adjustment in the medium term, but tensions within the Alberto Fernández administration and the ruling coalition lead to little room for structural fiscal adjustments and reforms.