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Tuesday
May212013

Argentine Inflation: It’s Tough When All You Get Is Lies

The issue of inflation is complex everywhere. Official rates are disputed. People can’t reconcile them with what they see at the store. There are different formulas and data sets, resulting in different rates, and everyone picks and chooses what suits their needs. But nowhere is the issue as “complex,” infested with lies, and shrouded in obscurity as in Argentina.

The debacle took on hilarious overtones when a Greek reporter, in her soft, harmless-looking manner, began to crucify Economy Minister Hernan Lorenzino during an interview at his office: “I have a very simple question for you, which seems very complicated these days: how much is Argentine inflation at this moment?” His response was an epic journey into obfuscation that got him entangled in such verbal spaghetti that the video, when it was released in April, went viral instantly. “We never speak about inflation, not even with the Argentine media,” an unseen aide explained after the minister had skedaddled.

His jab at official inflation, however, was on target. The interview took place late last year. By April, inflation, as reported by the Instituto Nacional de Estadista, was 10.5%, down from 10.6% in March, and from 11.1% in January, its recent peak, nicely heading once again in the right direction, after having been below 10% for much of 2012. But it’s a joke – though not nearly as hilarious as Lorenzino’s verbal spaghetti.

In early 2007, the staff at the statistical agency were booted out and replaced with political appointees who would toe the line on inflation and other inconvenient statistics. Since then, official inflation has been decided by edict.

Private economists, brushing off these figures with a nervous smile, kick around 25% as the current annual inflation rate. Mid-May the government nodded. With elections coming up in October, President Cristina Fernández de Kirchner has to hand some goodies to her base to buy their votes. So during the impeccably timed wage negotiations, she personally met with leaders of six unions representing 2 million workers, and struck the same kind of deal she’d made with the Railway and Bus Drivers’ unions, a deal that might get close to preserving purchasing power: wages would be increased by 24%! The closest to an official and somewhat realistic CPI that Argentina has.

To pour some oil on the fire, Torcuato Di Tella University (UTDT) – a non-profit private university in Buenos Aires – publishes the Inflation Expectation Survey. It measures what the public expects inflation to be over the next 12 months. For much of 2006, when the surveys began, median inflation expectation was 10%. The just-released index for April came in at 30%; and average inflation expectation rose from 34.2% to 34.9%.

UTDT concedes that the public has a tendency to overestimate changes in consumer prices. Nevertheless, it’s another ray of light in an obscure environment where the government has done its darnedest to replace any visibility with lies. Yet ordinary people, managers, and investors alike need to make decisions daily based on their understanding of inflation. And they’re making those decisions – just not the way the government wants them to.

The impact on the peso has been, let’s say, noticeable. In 1999, when I first traipsed around Argentina, the peso was interchangeable with the dollar one-to-one. ATMs would distribute both, depending on the button you pushed. Quite impressive. But Argentina seemed expensive, compared to other Latin American countries. And the economy was bogging down. Something was amiss.

The peso mirage ended in 2001, when people cleared out their bank accounts, converted pesos to dollars, and sent them overseas. To stop this torrent, the government froze all bank accounts; only small amounts of cash could be withdrawn. The people didn’t accept this quietly, which led to the declaration of a state of emergency, and more riots. In January 2002, the government lifted the dollar-peso parity, and set an exchange rate of 1.4 pesos to the dollar. People with money still frozen at the bank had been robbed.

And it never stopped. In early May on the black market, the peso fell through yet another floor: for the first time ever, it took over 10 pesos to buy a dollar. People have been scrambling to convert every peso they didn’t need at the moment into dollar bills. The official exchange rate is 5.25 pesos to the dollar. But it too is a lie, for most people. In one of those ironies that follow reckless deceitful governance, the government is running out of dollars and few people can buy them at the official rate – though the country is awash in dollar bills.

Since I write so much about financial fiascos, debacles, and nightmares, I’ve been asked about ways to protect assets in this environment. Thankfully, I don’t give financial advice. Even if I did, I wouldn’t have all the answers. But I just finished reading an excellent book on precisely that topic, so I decided to review it. Read.... Diplomatic Immunity For Your Assets In Interesting Times!

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