Argentina: the cost of under-reporting inflation

The IMF has given Argentina six months to improve the accuracy of its inflation numbers, amid warnings that continued under-reporting will lead to a painful adjustment and possible recession

  • By Matthew Plowright
  • 02 Feb 2012
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Here’s some news that will come as little surprise to dedicated Argentina watchers and Emerging Markets readers: the Argentine government has failed to make any progress in improving the accuracy of its inflation numbers.

From a statement issued by the IMF Executive Board yesterday evening:

Given the obligations of all member countries to provide accurate data to the International Monetary Fund (IMF), on February 1, 2012, the Executive Board met to consider the Managing Director’s report on proposals for remedial measures that Argentina has to implement to address the quality of the official data reported to the Fund for the Consumer Price Index for Greater Buenos Aires (CPI-GBA) and Gross Domestic Product (GDP).

The Executive Board regretted the absence of progress in aligning the CPI-GBA with international statistical guidelines and took note of the authorities’ intentions to adopt some remedial measures to address the quality of its reported GDP data.

The Executive Board approved a decision that calls on Argentina to implement specific measures, within a period of 180 days, to address the quality of reported CPI-GBA and GDP data, with a view to bringing the quality of the data into compliance with the obligation under the Articles of Agreement.

To recap, independent economists and international observers have accused the government of consistently doctoring inflation numbers since 2007, when the then-president, Nestor Kirchner, announced a shake-up of personnel at the national statistcs agency, Indec.

Since then, official inflation numbers have consistently tracked well below unofficial estimates, fuelling accusations that the government is deliberately underreporting inflation in order to pursue unsustainable pro-growth policies and to save it money on index-linked securities and expenditures. As Emerging Markets reported last March, in a further escalation of affairs, the government began levying fines on private economists and consultancies for producing higher inflation.

But that hasn’t stopped the discrepancy. According to the most recent independent economist estimates, Argentine CPI rose 23% in 2011, against INDEC’s official 9.5% price growth number.

Given that Argentina remains shut off from international markets and continues to adopt an antagonistic stance towards the IMF – it does not borrow from the Fund and has refused entry to IMF officials to conduct annual reviews – and that the IMF statement did not mention any sanctions or actions should it deem that the government has failed to make progress at its next review in September, the immediate fallout from the ongoing failure to report accurate inflation numbers, at first glance, appears minimal.

But the repercussions are in fact, extremely severe, according to Capital Economics’ Michael Henderson.

From a January 27th research note:

Getting a green light from the IMF on inflation accounting is a first step towards rebuilding credibility on official statistics and, ultimately, making a return to international capital markets. The reality is that if Argentina remains unable to borrow from abroad it will have to plug a deteriorating balance of payments in other ways. With unconventional sources, such as available central bank reserves, beginning to dry up, this is most likely to come via further protectionism and capital controls. Such measures will only squeeze domestic demand, leading to a slower rate of growth ahead.

As such, the Fernández government is faced with an uneasy choice: a short-term loss of face (followed by a probable gradual tightening of policy), or a more painful adjustment further down the line.

On balance, we think that the second option is more likely. Hence on this basis, and after a relatively benign start to the year in global financial markets, pressures on the “model” and currency will continue to build.

As always, the timing will be largely determined by how external events play out – particularly in grains markets. But given our call for a further deterioration of global growth in 2012, including a breakup of the euro-zone, things are much more likely to get worse than better for Argentina this year. We are therefore sticking to our long-standing call for a recession at some point over the current presidential term. 

And here’s Goldman Sachs’ Alberto Ramos:

The perceived lack of quality of the official inflation and real GDP statistics continues to colour the macro-financial assessment of the country.

Small changes towards a more predictable and conventional policy mix could unleash the large trapped economic potential and lead to significant asset price re-pricing. In fact, given the moderate/low public debt stock, favorable debt dynamics, and recognized economic and human potential Argentina would clearly belong in the coveted set of investment grade credits were it not for the shortcomings and macro and micro distortions created by the current policy mix. 

In other words, don’t even think about a return to international markets until you sort out your inflation reporting.

  • By Matthew Plowright
  • 02 Feb 2012

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