Martín Tobal, economist at the Bank of Mexico: "Relaxing monetary policy does not guarantee a real improvement in wages"

Martín Tobal, PhD in Economics from the University of California and director of Macrofinancial Risk Analysis at the Bank of Mexico, dismisses one of the most frequently heard claims from various economists: the need to loosen monetary policy to revive activity in hard-hit sectors, such as construction and industry, and thus improve purchasing power.

The economist's argument, which has a broader "big picture" perspective rather than a purely market-focused one, is that Argentina is "still very far" from a tension between activity and inflation, because price increases are still tied to "the perception of the rules of the game" and their duration, rather than to aggregate demand.

He therefore calls for signals regarding the monetary and exchange rate framework of a potential second term for Milei, while opposing "predictable and solid institutions" to price and wage agreements to coordinate expectations, and warns about the defensive position that banks might take in 2027 after the current level of delinquency, which could again hinder credit.

Below is the complete interview with Tobal, who clarifies, before starting, that nothing reflected in the article represents the opinion of the Mexican institution, but rather his own.

Journalist: What led you recently to pay more attention to the Argentine economy?

M.T.: I have always kept an eye on it, but now I have started, in addition to following it, to get more actively involved. In all the countries I have lived in - Spain, Mexico, the United States, France - I had seen a set of rules that were more or less accepted among economists, and here even those small sets of rules were being debated.

It seems to me that a few years ago, with the change of administration, that opened space to re-establish some very basic rules as something that is not up for discussion. There were many years when almost indisputable things were debated, not because one is undemocratic, but because they are almost laws of physical nature, such as the existence of a budget constraint.

Q.: If you had to describe the economic situation of Argentina today to someone living abroad who does not follow it, what would you say?

M.T.: I think the analogy of Colapinto is a good one; he has made an effort, and undoubtedly the pilot is important, but the most important thing, even more than the pilot, is the car. Argentina is in this significant transformation of building the car. But in the middle, there is a year where there will be very intense and passionate discussions, as we Argentines are, about who will drive it.

So there are these two cycles, the political and the economic transformation, that interact with each other. There is no doubt that the direction is correct, but the peculiarity of Argentine history is that not only the direction matters, but also the path. Macri's experience is very clear in that sense: even if the direction is correct, if the path is not appropriate, you could end up in another place.

Q.: And what warnings do you find on this path?

M.T.: Many times economic analysis focuses on things that are important but of secondary order, and loses focus on the perception of whether the regime is consolidated or not. Argentina has already gone through a first stage of strong nominal stabilization and fiscal order, with the advantages that this has: inflation has dropped sharply and it also had certain characteristics of a relatively expansive program. But now it has entered a completely different stage.

The most powerful mechanism for coordinating expectations, which is what matters at this moment, is undoubtedly to anchor the expectations that the rules will not change again. This implies that communication takes on a fundamental role: anything that consolidates the expectations that the regime will not change, especially in an election year, has a multiplying and broadly positive effect.

"The Government must be increasingly predictable about what we should expect in a second term"

Q: What are those important but secondary things?

M.T.: The need to coordinate expectations through prices and wages is constantly cited, and it is even placed on an ideological plane, as if it were a heterodox tool. My point is that the best mechanism for coordinating expectations is predictable and solid institutions, because that makes people act thinking that the rules will be followed. This is called coordination.

Concretely, it would imply that the opposition political class should be much clearer about what macroeconomic regime they would like to have; it is more complex due to electoral incentives, but it would be the definitive test. And for the government, it means being increasingly predictable about what we should expect in a potential second government of Milei, in terms of the monetary and exchange scheme.

Q: Looking ahead to a potential second term, what should we expect then?

M.T.: In the first term, there was a monetary order that involved a lot of coordination between the Ministry of Economy and the Central Bank: the balance of the Central Bank had to be cleaned up and excess money had to be reduced. Now there necessarily has to be a process of institutionalization; it is necessary to consolidate the perception that there is a minimum set of rules that cannot be discussed; for example, that the Central Bank cannot finance the Treasury.

The Central Bank has been taking some steps: it publishes reports more frequently, the IPOM has returned, and press conferences have resumed. Anything that makes analysis, communication, and decision-making as systematic, institutionalized, and transparent as possible is the path that Argentina must take. It has started to take it, but it is still somewhat in the middle.

"We are far from facing a neokeynesian tension between activity and inflation"

Q: Given the latest numbers from the industry and construction released by INDEC, what do you think about the idea of relaxing monetary policy to boost activity? The Vice President of BCRA, Vladimir Werning, ruled out relaxing the monetary squeeze.

M.T.: It is not clear that a more relaxed monetary policy implies an improvement in real wages. This is somewhat the point of Vladimir Werning, put another way: a tighter monetary policy should be linked to lower inflation and, although this is not mechanical, to a more appreciated exchange rate, and when in Argentina the exchange rate is more appreciated, real wages are higher. It is true that a more relaxed monetary policy is linked to greater economic activity, and that tends to put upward pressure on real wages through that channel. That said, we are still very far from facing what is called a neokeynesian tension between economic activity and inflation. Inflation in Argentina still has a strong component that does not necessarily relate to aggregate demand pressure: it has a lot to do with the perception of the rules of the game and how persistent they will be. And in that, you have an election in the middle.

Disinflationary processes are always long, and international experience shows this. There are some shorter ones, like Israel's, but they are not processes that last two or three years. In this second stage, the fundamental point is the anchoring of expectations. There is a kind of dead weight that will gradually decrease. So I am not so clear that the great gains in activity should come from a less tight monetary policy: they should rather come from transparent communication, predictability, and an increasingly anchored perception that the rules will be as clear as possible. It seems like a pessimistic message, but the reality is what we have: there is an election, and we cannot change that.

Q: Those who ask for a more flexible monetary policy rely on the decline of key sectors for employment and the loss of purchasing power compared to November 2023. Is this deterioration shown by the INDEC indicators a necessary part of the transition, or could the change in economic logic have been made without these types of consequences?

M.T.: It is impossible not to have these consequences. The discussion is rather about the magnitude and duration. Undoubtedly, there are things that could be done differently, but they seem secondary to me. The most fundamental thing now is to root the idea that the economy will be less and less exposed to political noise. A very clear case here is the issue of delinquency, which seems to me a central problem for the transition: the better the credit market functions, the smoother the transition will be and the lower the costs will be. Putting the discussion on that plane seems very dangerous to me because we tend to lose focus. It's like comparing a tsunami with a little wave in Mar del Plata.

"If I were the Government, I would not take consumption as a source of concern"

Q: I understand. But in practical terms: if in 2027 consumption remains unstable, the industry in a sawtooth pattern, and construction expensive, perhaps the Government cannot continue with a program that provides long-term stability. Do you not see a risk there?

M.T.: I think they are two distinct phenomena: one is consumption and the other is the more general conditions of the labor market. It is true that Argentina has advantages in producing in certain sectors, like energy, which are less labor-intensive. You have a point: the direction in which the economy is going is to produce what it produces best, and what is contracting is a bit more labor-intensive, especially urban. Consumption is another thing. I am currently working on comparing the Argentine stabilization program with others, and private consumption is soaring. If one takes the national accounts data, which is what should be taken, the comparison is absurd, partly because the Argentine program is being a bit more expansive in terms of aggregate activity. So I would not take consumption as a source of concern if I were the government.

I do understand the point about employment, with the nuance that what is growing is informal employment. I also agree that there is already a transition and a structural change happening, and that there are costs along that path. But let me answer you with a question: does that necessarily mean that the government, supposedly being more pragmatic, can improve things? It is not clear. I feel that a misunderstood pragmatism can worsen rather than improve things.

Q: What would a misunderstood pragmatism look like?

M.T.: He is an anonymous alcoholic who can have a drink to get through the night: one drink leads to another. And above all, what matters here is not just whether we are going to have another drink, but what people think we are going to do, what the markets think, what the world thinks we are going to do.{#p-1789247648012-93246}

"I don't think the economic opening is excessively fast"

P.: If nominality decreases and the economy opens up a bit more to the world, the efficient company will continue its course, while those that cannot adapt will have to reconvert or close. Even so, shouldn't the Government take some kind of measure to accompany this path, or is it enough to restore the rules of the game?{#p-1789247648012-43486}

M.T.: I believe the Government should not choose winners and losers, because it is very difficult to define that. What can be done is to think carefully about what the speeds are or what the sequence of policies should be. I do not think that the economic opening being made is excessively fast in any way, but that can be argued, and if I were to argue it, I could say: "Okay, if you want to open the economy very quickly, then lower my taxes at the same speed." But again, the risk all the time is to confuse the broad brush with the fine brush and end up discussing the fine brushes.{#p-1789247648012-54582}

P.: In August, inflation was 1.7%. Milei had suggested it could reach 0%. At this point in the program, is it possible and necessary to reach that level?{#p-1789309056119-89258}

M.T.: It is not about a specific number. Eventually, inflation will decrease; what is less clear is at what speed, with what trajectory, and what the costs will be. In this, the perception that we are not going back to a regime like the previous one will again be fundamental.{#p-1789247648012-73288}

P.: You mentioned the arrears earlier. One of the factors that explains the jump in payment delays to the current level was the increase in interest rates before the 2025 elections. Can this phenomenon be replicated next year, in the context of the elections?{#p-1789247648012-44993}

M.T.: We will definitely not see the same thing. It may or may not have to do with the interest rate, but evidently, the arrears increased because banks had a certain criterion in granting credit, and they clearly will not act the same way as they did two years ago. The concern about arrears is not the financial system: banks are very capitalized, they have built up a lot of reserves and made many provisions for expected losses.{#p-1789247648012-61661}

The Argentine banking system is very solid and resilient; it is not a banking crisis problem. The most worrying thing is that banks become more defensive, which cuts off credit, further hinders the transition, and ends up increasing costs. What is different in Argentina is that this increase was very sudden and very specific: it took place during a regime change, when banks are literally changing their business and learning to grant credit. The dance was just beginning, and it was the first piece.{#p-1789309542850-90597}

P.: Is it about evaluating the behavior of those in debt, who took credit and then could not pay it back, or rather noticing a situation of force majeure that led to the lack of payment?{#p-1789247648012-39229}

M.T.: There is no bad intention. It may be true that many of these people have not fully internalized this long-term cost because there was no credit market: Argentina had credit penetration levels of African countries or less, something ridiculous. More than bad behavior, I would frame it as a failure to anticipate costs because they were operating in an unknown world. In the short term, I would focus on not cutting off credit granting. That matters more than the arrears.{#p-1789247648012-47975}

"The Only Path is Patience"

P.: You mentioned at the beginning of the conversation that you had work experiences in different countries. What lessons or learnings should the Government import from abroad and convey in the face of an electoral year?{#p-1789247648012-39879}

M.T.: Patience. These are processes that other Latin American countries went through 30 or 40 years ago. Argentina first had those failed attempts, and every time you try again it becomes more difficult because building trust is very complex, especially when you have previously destroyed it. The only path is patience.{#p-1789247648012-19882}

We are so caught up in what is called the red circle and in the whirlwind of news that our way of seeing things is not necessarily that of people who do not consume as much of this. I try to be more empathetic and put myself in the shoes of those people. On the other side, you have such a significant and drastic drop in inflation, and a relatively favorable environment for economic activity, which makes this employment problem perhaps a little less severe. Although they may be facing needs, the change was so drastic that, weighing it in the balance, they notice a positive change.