INSIGHT: Argentina’s petchems players grow pessimist as inflation reaches nearly 115%

SAO PAULO (ICIS)–Argentina’s annual rate of inflation rose again in May, up to 114.2%, an increase from April’s 108.8%, while petrochemicals players in the country believe economic conditions are set to worsen before they can improve.

According to Argentina’s statistics body Indec, monthly inflation – measured under the Indice de Precios al Consumidor (IPC) index – rose in May by 7.8%, a slowdown from April’s 8.4% price rises increase.

Housing and utilities costs rose by 11.9% during May, compared with April, while prices for basic items slowed down their increases, with the subcategory for food and non-alcoholic beverages’ prices rising by 5.8%.

Argentina annual rate of inflationSource: Indec

INFLATION AT 150%?
Last week, an economist at Buenos Aires-headquartered Fundación Capital said Argentina’s rate of inflation may end up 2023 averaging 147%.

Carlos Perez added that GDP growth, which international bodies such as the IMF still expect to be in the positive in 2023 – albeit at a squalid 0.2% growth – could stand at a negative 3.0-3.5% in 2023, compared with 2022.

Argentina’s GDP rose in 2022 by more than 5%, although the sharp depreciation of the peso made the economy worth only $2.93bn, or Argentinian peso (Ps) 726bn.

The peso’s official rate against the US dollar has more than halved in the past 12 months, one of the key reasons why inflation has jumped.

A lower-valued peso makes imports into the country more expensive; meanwhile, the government has embarked on a campaign to increase dollar reserves, of which the Banco Central de la Republica Argentina (BCRA) has a dire need of.

A direct consequence of that campaign has been limitations to imports, aiming to limit the amount of dollars leaving Argentina.

In April, the government increased its push by raising import taxes, a measure which is set to hit manufacturers hard.

Industrial companies were already having trouble to import key machinery to keep their operations running, and the import tax hike is expected to worsen things for them.

A bad agricultural season due to a severe drought has also dampened hopes that more dollars could come in, putting even more pressure on the country’s Treasury, and making emergency funding from the IMF ever more needed.

The Washington-based body is mulling whether to attend Argentina’s request to free funds planned for September-October at an earlier date, so the country can keep its public services running.

Speaking at an event organised by the Latin American Petrochemical and Chemical Association (APLA) on 6 June, Fundacion Capital’s Perez echoed the view of many petrochemicals players in the country consulted by ICIS: that 2024 will be even harder for Argentina.

If the new President to take over office in December does the “right things”, Argentina’s economy may start to pick up in 2025, sources said.

A general election is planned for October, with the incumbent Alberto Fernandez not seeking re-election; his party’s chances to win again are growing slimmer as the economy keeps worsening.

“The government will get to December with several added problems: a high debt with the IMF, the risk of a severe recession, and the BCRA’s dollar reserves at minimums,” said Perez.

“The future months will not be easy for Argentina. What the country needs is a new deal with the IMF [to continue sustaining its public finances], a severe fiscal adjustment, and a depreciation of its currency.”

The sources who believe an improvement is possible – whenever that may happen – say the country will rely for the recovery on its agricultural prowess and its oil and gas exports.

The country’s major YPF wants to speed up exports as it opens new trade routes from its Vaca Muerta fields in north Patagonia.

However, a US-like, shale gas-induced boom in polymers production in Argentina may need to wait, said an YPF executive at the same APLA event, which ran in Buenos Aires on 6-7 June.

“Argentina sends grain to feed 500m around the world, and we have so much crude oil and natural gas resources yet untapped,” said a source at a large polymers trader in Argentina.

“The country will recover, but the months leading to the start of that recovery will be very tough for many in Argentina.”

How does a company deal with ever-rising inflation in terms of the salaries it pays to its employees, however?

The source said its company reviews salaries every two months, trying to keep up with price rises. If inflation stood at 7% during a certain month, and 8% the next, salaries will be revised up by 15%, it said.

“But our company has a sound financial position and is able to review salaries according to inflation: many employees in Argentina are not being as lucky and are losing purchasing power every month that goes by,” it added.

HOW LOW CAN THE PESO GO?
If they wanted to buy dollars, few Argentinians would have access to the official exchange rate, which on Wednesday stood at nearly 250 pesos to the dollar.

The rate they would be able to buy will stand around 500 pesos to the dollar, rather. That is the “blue dollar”, as its name in the street goes.

However, in a maddening situation for anyone living in – and observing – Argentina, the high rate of inflation has created an unpredictable exchange rate system where multiple US dollar valuations are used for different economic sectors.

Among others, there is the soybean dollar, from the income generated by Argentina’s key soybean exports, or the tourist dollar.

Currently, there are as many as 12 exchange rates for the dollar. The financial newspaper Ambito Financiero keeps daily track of them; see them here.

Then, if the new President to be elected in October is to embark in a depreciation of the peso to kick start a potential recovery, how low could the peso go?

That is the question in petrochemicals players and economists’ minds.

Most sources agree that whatever rate the currency is depreciated to, it will be closer to the $1:Ps500 of the blue dollar than the $1:Ps247 of the current official rate.

BUENOS AIRES CENTRE – AND THE REST
The visitor to Buenos Aires central neighbourhoods – the likes of Palermo or Retiro – may not notice it is visiting a country under severe financial strain.

Shops, restaurants, cafes, and Buenos Aires’ world-famous bookshops are all vibrant places, full of customers spending money.

Just like in Sao Paulo or Lima or many other Latin American metropolis, the visitor would only need to travel a few kilometres away from Buenos Aires’ centre to see what people’s real lives are like.

The scenery completely changes. Latin America remains one of the most unequal regions in the world.

However, even in the well-off areas, many Argentinians are deciding to leave. A source at a medium petrochemical player, in its late 30s, conceded that around half of its educated, formerly well-to-do friends have left the country.

The US remains a top destination for those leaving, but as Argentina has deep-rooted connections with Europe, an Italian or Spanish passport is also an option many choose, as it opens the door to live and work in the 27 countries within the EU.

Italy and Spain make it easy for descendants of their nationals in Argentina to get a passport.

Argentinian brains are leaving at speed while, paradoxically, the country keeps receiving migrants from other Latin American countries seeking better living conditions or, simply, freedom.

Many Venezuelans have found in Buenos Aires liveable lives after their own lives in their country were torn apart by Nicolas Maduro’s financial mismanagement and political repression.

Two sources outside chemicals, a couple who left Venezuela seven years ago, put it bluntly: “Our salaries are not high, and we cannot afford luxuries, but we are living a decent life here now.

“More importantly, we are living in freedom here.”

Meanwhile, on the other side of the coin, a Venezuelan petrochemicals source at the APLA event showed full support for the regime. Asked about the estimated 5m Venezuelans who have had to leave their country, he said they had done so “on their own will”.

Back in April, a source at Argentina’s petrochemicals with more than five decades of experience had already expressed dismay at the country’s situation, adding it feared social revolt as the situation becomes untenable.

At the time, it cited a quote by philosopher Dale Carnegie: “Today is the tomorrow we worried about yesterday.”

Last week, the source remained pessimistic. A lover of philosophy, he said he has set up a group on Saturdays with other “wannabe intellectuals” to debate ideas and authors. On Sundays, he tries to spend them with the family.

“Anything is good if it can take you away from the daily checking of exchange rates, inflation figures, and the rest. We are in deep trouble, and things will take a while to improve,” it concluded.

($1 = Ps247.77)

Insight by Jonathan Lopez