Alphacast Highlight: 10 charts that shaped Argentina in 2022

By Mariano Sanchez Moreno (msanchez@alphacast.io)

Inflation outlook for the next 4 years: blood, sweat, and tears

After 2022 had, in all likelihood, the highest inflation printing in 30 years, inflation is expected to remain high for the foreseeable future. With the expected figure for the last year being a hair under 100%, prices are expected to follow and remain at elevated levels, with expert surveys forecasting slightly higher price growth for 2023 and a more moderate, but still extraordinarily elevated, value for 2024. Prices are not expected to deccelerate significantly, and historical comparisons show big upside risks and provide little hope of a slowdown.

Remunerated liabilities interest payments among key drivers in monetary base change

Monetary factors contributed to the previously mentioned acceleration of price growth, with the monetary base growing significantly by the end of 2022. On net, the Central Bank increased the supply of currency in circulation, with its contractionary monetary policy being offset by interest payments on remunerated liabilities, USD purchases, operations with the Treasury, and other factors. 2023 is not expected to be much different, with the looming election and various economic challenges making a disinflationary turn less likely.

Monetary emission due to remunerated liabilites interests accelerated

Following the previous chart, the Central Bank's remunerated liabilities played a major role in the growth of the money supply during 2022. Given both the global tighening of monetary/financial conditions and the surge in inflation at the domestic and international level, the policy rate has had to grow rapidly to match the new economic panorama. However, this has also meant an increase in the interests yielded by Central Bank-issued assets, and therefore an increase in the monetary authority's expenditures, resulting in a net increase of the money supply.

Real interest rates showed unsteady patterns in 2022

On that note, a closer look at the monetary policy rate. Both monthly and annual rates have been negative almost continuously since 2020, and the surge in inflation was not matched one-by-one by raising rates, resulting in more negative net returns to assets throughout 2022. However, the recent decceleration of price growth, especially November's surprisingly low printing of 4.9% MoM, has resulted in a more positive ex post real rate; nonetheless, nominal rates have not increased since October 2022, putting the real interest rate largely at the mercy of the price level.

Reserves grew unstably in 2022

The rise in commodity prices during 2022, as a result of global geopolitical developments, presented a golden opportunity for FX accumulation - the impact of this factor can be clearly seen by the marked increase in the net reserve position at the cusp of March, when prices spiked due to the escalation of tensions between Russia and Ukraine. Performance was uneven since then, with large swings in reserve growth due to an overvalued exchange rate, a recovering economy, and higher international prices for imports. Reserves grew notcieably below target in July, but overperformed in October and December, with a net yearly gain of +6.4bn USD.

FX devalued at high pace, but below inflation rate

The wholesale exchange rate grew at an uneven rate through 2022, matching developments in interest rates: the seemingly sudden acceleration of inflation necessitated a rise in the depreciation rate to avoid further overvaluation. Given how the exchange rate had grown far below inflation in 2021 (for instance, a 16.7% annualized rate in December vs an annual inflation rate of 50.9% YoY), there has been little room for appreciation of the peso. Sudden tensions in the FX markets in July and August, as well as a subsequent surge in inflation, precipitated a higher annualized depreciation rate in the last third of 2022.

Outstanding inflation-Linked bond stock grew to record high

Since 2020. the stock of inflation-linked CER bonds as a share of GDP has nearly tripled, from 6.5% in January to 17.9% in November 2022. This marks a desire by investors to shield themselves from growing price increases since inflation began accelerating in late 2020. The growth of CER bonds poses major challenges to the authorities, who will have to balance disinflation with the fiscal strain of backwards-indexed bonds.

Inflation adjustment coefficient higher but erratic during 2022

The TIR implied in inflation-linked bonds rose during 2022, with a large spike during the intense macroeconomic uncertainty of July. Levels have been consistently higher ever since, reflecting a more volatile and inflationary environment, but with notable variability within the period. Forward rates have been drifting downwards since October, following cooler inflation printings and perhaps fewer news on the macro front.

Argentina's bonds showed weak performance, though not unusually so

Argentinian bonds fell significantly in 2022, dropping around 17% throughout the year. This follows two years of loss of value, with assets being worth around a fifth less than three years ago. However, this performance was not unusually weak by emerging market standards, at least in the past year, as both the EMBI and JMK indeces show similarly subpar results for non-developed markets. Given the current global financial panorama, it is unsurprising that markets are rejecting riskier developing nations in favor of now high-yielding developed ones.

FCI subscriptions grew, but heterogenously by categories

FCI subscriptions grew significantly in 2022, although each fund category performed differently. Money market funds were the year's biggest winners, with both types (classic and dynamic) having gained hundreds of billions by December. Meanwhile, multi-currency fixed income funds had a positive but more modest performance, while variable income and most fixed income categories showed little change. Lastly, T+1 fixed income and CER-focused fixed income had a negative showing, with net subscriptions falling - quite significantly, for the latter group. The changing risk apetite of investors will be a major determinant of performance in 2023.