Argentina: Competitiveness O Stability Is that the question?

Argentina industrialists are concerned about the decline in competitiveness of the real exchange rate and no wonder. With the dollar quasi-fixed at $ 3.10, with an inflation rate of more than 20% on year, the real exchange rate of Argentina's economy has been deteriorating at a fast pace. Such is the deterioration of the real exchange rate, as reflected in an article by Sebastian Bell for the site "IECO?, The relationship between the value of the peso and the dollar would be one by one to 2009 in real terms. Until a few weeks ago, from the field had not heard many complaints. Is that high international prices of agricultural commodities, the country could maintain its profitability despite the embargoes imposed by the national government. But with the sharp fall in international prices of agricultural commodity prices, together with the retention and increasing value of agricultural inputs (which adds to the severe drought suffered in various regions of the country), the current situation is totally different and that is why we have already announced that the field will claim the Secretary of Agriculture Charles Cheppi, a dollar between $ 3.50 and $ 3.80, implying an average jump of nearly 20% of its value current which is currently at $ 3.12.

The claim is not far distant field which made industrial (albeit timidly). Thus, two areas of importance in the economy of Argentina, virtually join in the request for a more competitive exchange rate. Probably from the government to note how external accounts deteriorate steadily and perhaps recognizing the need to do something to improve the competitiveness of Argentina's economy, but the government be willing to devalue the Argentine peso in the quest to restore loss of competitiveness of the export sector? At the time, when the crisis broke, the nominal exchange rate went from one to one relationship with the dollar at a rate of $ 3.5 to the dollar (and even got to be around $ 4 per dollar). At that time, the external sector was met with a remarkable improvement in competitiveness and thus Argentina's economy could start to recover by external demand.

But unlike what happened in early 2002, the current economic situation in Argentina is totally different from that observed at the time. Is that the strong economic downturn, coupled with exchange rate appreciation that the Argentine peso was made possible currency devaluation like without seeing it translated into an inflation rate of the same level (although it was higher than in 2002, was much lower than depreciated nominal exchange rate). The 'pass trough' of Argentina's currency devaluation to prices was low. Today the possibility of devaluing the peso, may have a greater direct impact on inflation rate since the pass trough is much stronger than it was in 2002. That is why the government, the nominal exchange rate, is now an anchor on the price level, so that their upward movement can not be too abrupt. And if the peso devaluation is not the alternative that the government manages to rebuild the competitiveness of export sectors, there would have to work on measures to improve the competitiveness of productive sectors.

To make matters worse, reducing the tax gap is facing the government begs the need to gradually reduce subsidies, which has its counterpart in the recognition of price increases. So for example, has made the gas issue. To all this must be added that the country is more conditioned in their actions in the eyes of the world. Is that the need to close the financial program for the coming years, practically forced the president to find friends to Argentina international financial markets. In this context, Argentina announced it will cancel the debt with the Paris Club and, earlier this week was the announcement of the development of a proposal to bondholders who declined the restructuring of debt in default drop . Argentina, beyond the initial euphoria that followed the ads, not have it easy in the negotiations. With the Paris Club, have not yet agreed on how much is the amount to pay (there is a difference of about U.S. $ 1,200 million), while bondholders are suspicious and that's what I have said those who are part of the Savings Association of Argentina (AARA).

The search for a solution to the existing debt with the Paris Club and the holdouts, it is only a necessary condition for access to international financial markets. But are not the only access to a reasonable rate. The control of inflation, transparency in statistics and greater economic predictability are other market conditions will be imposed on Argentina to re-accept it. Faced with the constraints that are imposed on Argentina from foreign markets, the possibility of occurrence of a significant devaluation appears remote. For now, the best you can do the Argentine government in terms of competitiveness is to work on price stability and that this front comes from the main exchange deterioration in competitiveness. For now, the feeling that a nominal devaluation of the exchange rate does not solve the problem of competitiveness of the economy. Competitiveness is to search through an improvement in production efficiency, eliminating distortion and better infrastructure, among others. The government of Cristina Fernandez de Kirchner should work in these areas if it is to improve competitiveness. We meet again tomorrow, Horacio Pozzo