With Argentina seeking to nationalize its largest oil company, Morgan Stanley’s Daniel Volberg sees increased odds of a hard landing.“Policy radicalization” has suddenly become the top risk in the country.
Volberg says the turn in policy has been abrupt — until recently, the country seemed to be charting a classically orthodox course.
But just in the past few weeks, the Kirchner administration has performed an about-face.
Here are his fears, in detail:
“The authorities have suspended further subsidy cuts underlying the fiscal tightening element of the macro adjustment. The new central bank charter allows the authorities to loosen monetary policy even further to finance the fiscal deficit by – under “extraordinary conditions” – raising the limit on short-term central bank financing of the Treasury to 20% of 18 months of fiscal revenue compared to the normal limit of 10% of 12 months of fiscal revenue. This is an expansion of roughly 2.5% of GDP.
“Meanwhile, the authorities have suspended the clause of the new central bank charter that would have required all bank fractional reserves to be held at the central bank – ending what we argued would have effectively amounted to a hiking in reserve requirements and a tightening of monetary policy.”
Volberg goes as far as to invoke the “D” word:
“Without addressing the high inflation that continues to strengthen Argentina’s real exchange rate and contributes to erosion of the current account, the expectations and likelihood of an exchange rate devaluation are likely to gain ground.”