Adverse inflation data ahead of the elections puts the government under pressure

ARGENTINA - Report 17 Apr 2023 by Esteban Fernandez Medrano

Last Friday’s publication of March National CPI inflation at 7.7% m/m was higher than expected, even considering the 7.1% m/m previously published by CABA CPI. And even considering March’s relatively strong seasonality, the implicit annual inflation, based on the monthly result, rose to 114% y/y. March is, therefore, the third consecutive month that suggests a significant acceleration of the annual inflation rate. When analyzing the CPI breakdown, we see that annual food inflation continued to accelerate in comparison to headline inflation.

But, leaving aside sectoral comments, from a monetary perspective, the continued rise of remunerated debt from the BCRA, in terms of M0, indicates that inflation will be difficult to control in the medium term once the sterilization efforts become impractical. With a debt level of more than 230% and projected interest payments over the next 12 months of 175% of M0, it is difficult to envision how money demand will respond in an electoral year.

Aware of this problem, the government is trying to anticipate the expected portfolio shift by seeking alternative financing sources. Economy Minister Sergio Massa recently announced a credit line with the IADB of USD 600mn, USD 200mn for immediate disbursement, on top of the recently announced credit line with the World Bank for USD 950mn, and announced investments in infrastructure of USD 500mn financed by the Saudi Development Fund.

Needless to say, developments such as ballooning inflation, or the informal cash FX rate's reaching the psychological barrier of 400 AR$/US$, or poverty reaching 39.2% of the population, are bad news for a government that is still struggling to define its electoral offer. Such poor economic results would weaken the electoral outlook of any official candidate. But the main opposition coalition, which does not have to bear the responsibility of the economic hardships, is also suffering the complexities of coordinating a presidential candidate.

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