Etiquetas
In the intricate financial landscape of Argentina, distinctive patterns are delineated across various temporal scales that define the country’s economic dynamics. Identifying and evaluating the forces prevailing in the short, medium, and long term is imperative to understand the governmental strategy, financial projections, and investment outlook.
The minister/candidate believed in achieving the signing of a technical understanding agreement with the IMF without resorting to monetary depreciation. The anticipation was for approving a fund allocation in two tranches, corresponding to June and September, amounting to USD 7.5 billion.
However, the agreement necessitated the execution of a «sequence» of measures, with the most challenging for the minister being a correction of the currency imbalance, which went beyond mere fiscal devaluation.
Massa aims to maintain his unwavering stance against devaluation, spurred by the proximity of the elections. His strategy involved continuing the same course of action, even post-elections, hoping to attain a minimally acceptable outcome in the polls. Nevertheless, the effect did not transpire as planned.
By force, they strangle you.
To secure the disbursement from the IMF and avert a default, a series of classical, ultra-orthodox austerity measures were adopted, contrary to the Kirchnerist ideology, to tackle a crisis that was nonetheless inevitable.
Responding to the escalating demand for all types of dollars, a devaluation of 22% was enforced, lowering the peso’s value to $365 per dollar in the official market. Simultaneously, an increase in the interest rate to 118% was imposed to deter purchases of foreign currency in the parallel market.
Furthermore, significant hikes in public service tariffs, such as electricity, gas, and fuels, became necessary to update rates in the face of projected inflation rates of 10% and 14% for August and September, respectively.
The devaluation, led by the Central Bank, occurred abruptly, with a 21.8% leap in the exchange rate. This sudden devaluation entailed unconditional compliance with IMF mandates, resulting in a 22% surge in the retail dollar and all variants of the official market. The dollar for credit card transactions reached $639.6, and the Qatar dollar (for expenses exceeding $300 using cards) was $731.
Naturally, parallel dollar rates also experienced a significant increase, with the «free» dollar reaching nearly $800, only to later stabilise based on supply and demand dynamics.
These measures were undertaken amidst electoral anxiety for the Kirchnerist party and in harmony with the sine qua non-conditions set forth by the International Monetary Fund (IMF) to conclude an agreement requiring the minister-candidate to concede entirely.
Having capitulated entirely to the IMF’s demands has led to the necessity of offsetting the inflationary shock resulting from the immediate pass-through effect of the devaluation on prices.
The compensatory measures seek to address the economic and financial crisis from multiple perspectives, supporting diverse groups and sectors affected by economic volatility and inflation. The estimated total direct cost of this new «Plan Platita» is around $500 billion, equivalent to approximately $1.428 billion at the official exchange rate. These pesos will be injected into circulation, thereby reinforcing inflation.
The beneficiaries are numerous, so much so that if the $500 billion were divided among Argentina’s 45 million citizens, each would receive less than $12,000, as reported by some media. However, this arithmetic is flawed since the beneficiaries are fewer, particularly the most disadvantaged. Considering families of three and the projected distribution, each family would receive $39,000 – an insufficient sum to counteract inflation.
The aid will be directed towards workers in the public and private sectors, as well as towards freelancers, retirees, domestic employees, recipients of social programs, small and medium-sized enterprises (SMEs), and the agricultural industry. Retirees are advised to abstain unless they receive the minimum pension.
Desperate Measures Aimed at Avoiding an Electorate Catastrophe with an Economic Cost Unsustainable Without a Currency or Monetary Crisis
In a series of announcements made on August 27, 2023, by the leader of the Front for All party, Sergio Massa, a package of measures was unveiled. These measures include pensioner bonds, reinforcements for the Food Card program, and the Potenciar Trabajo (Boost Work) initiative.
These decisions entail a fiscal cost of 0.4% of the Gross Domestic Product (GDP), as preannounced by the International Monetary Fund (IMF) before the announcements. These new measures pose an additional severe challenge to the September goals of the program with the IMF, making these objectives even more challenging to attain.
The minister/candidate employed an unserious and unprofessional platform – his Instagram account – to communicate these initiatives. He also informed about the introduction of a new «soy dollar». According to his statements, 25% of the currency will be allowed for temporary soybean acquisition for flour, oil, and soybean pellets exports, thus preserving employment in the soybean agro-industrial complex. This measure suggests an effective exchange rate of around $450, considering a calculation based on the official exchange rate and the Contado con Liquidación (CCL) rate.
On Friday, the IMF published the «Staff Report,» offering a technical perspective on the Argentine program. Noteworthy among the report’s highlights are the IMF’s projections, which remain imprudently and selectively optimistic despite policy deviations. The information establishes fiscal and monetary targets and reserve levels, underscoring the challenge of meeting an array of objectives – an inconsistency on the IMF’s part, given that these objectives have already been agreed upon.
The reserve situation is of paramount importance.
Adopting a fixed exchange rate regime encourages a leaning towards interest rate instruments. However, this inclination is contingent upon prevailing circumstances and, solely at this juncture, the definition of the next president.
The adjustment of relative prices places us in a distinct context. Despite the recent injection of funds from the IMF, net reserves hover around a negative $4 billion. Expectations regarding the dollar and exchange market behaviour are also under scrutiny. As of August 16, reserves amounted to $23.612 billion. Including $7.5 billion from the IMF would elevate this figure to $31.112 billion.
The Realm of the Immediate: Interest Rate and Exchange Rate Freeze
In the realm of the immediate, the Argentine financial market is heavily influenced by the interest rate and the freeze on the wholesale exchange rate. With a freeze on the wholesale exchange rate at 350 pesos until the second round of elections in November 2023 and an interest rate of 9.83% per month, the potential arises to sell dollars and redirect funds towards interest rates during a 60-day carry trade, potentially generating profits in local currency. This strategy takes advantage of a double-digit monthly interest rate globally, where the annual rate hovers around 5.0%.
However, considering that the official dollar exchange rate is expected to remain stable until October, a distinct opportunity exists for engaging in a «carry trade.» This entails the prospect of selling dollars and investing in pesos, accruing interest, and subsequently repurchasing dollars in a manner reminiscent of the previous administration, its officials, overseas funds, and those privy to insider information, a group that is never negligible.
The strategy, which melded devaluation, a stable exchange rate, and elevated interest rates, implemented previously with the aim of averting exchange rate pressures until October, generates the potential to reap profits denominated in a robust currency. Although the escalation of domestic prices and returns in local currency may surpass the possibility of sustaining the wholesale dollar around the $350 mark over the coming six weeks, the pronounced volatility and uncertainty could also erode the potential gains associated with the «carry trade» strategy.
It must be acknowledged that, within the current context, the feasibility of maintaining the dollar at $350 until the general elections are dubious, considering the backdrop of limited reserves and the escalation of prices. The prospect of once again confronting an official exchange rate devaluation looms prominently. Consequently, significant «carry trade» operations have not yet commenced.
An indicative signal prompting scepticism about prospective developments is the sustained substantial demand for dollar-linked assets observed over the past week, along with investments aligned with the Coefficient of Stabilization of Reference (CER), which mirrors the price increase reported by the National Institute of Statistics and Censuses (INDEC).
The anticipations of devaluation lack firm establishment, and the market lacks confidence in the potential cessation of applying the «crawling peg» or minor daily devaluations by the Central Bank. The landscape is one of pervasive uncertainties.
Medium-Term Outlook: Dollar-Linked Assets and Future Projections
Financial assets tied to the dollar’s evolution assume prominence in the medium-term horizon. Holding assets adjusted by the wholesale or MEP dollar, such as negotiable obligations or sovereign bonds, emerges as a prudent tactic over 60 days. This approach responds to the inherent volatility in the dollar’s behaviour and influence.
Imminent Challenges: Public Debt, Fiscal Surplus, and Necessary Adjustments
However, short- and medium-term tactics and substantial economic challenges remain customary within the Argentine horizon. The publicly held debt denominated in pesos reaches considerable figures concurrently with a negative cash flow and existing debt, engendering a significantly compromised financial equation.
Undoubtedly, attaining a notably high fiscal surplus as expeditiously as possible is imperative. Nevertheless, in the current context, the projection of achieving such an objective remains utterly hampered by the absence of presence in international markets and the lack of a balance of payments surplus that would permit an augmentation of the Central Bank’s reserves.
As of August 16, the monetary liabilities are at a critical juncture. Unremunerated monetary liabilities constitute 25.2% of the total monetary penalties, amounting to $6.4 trillion. Conversely, remunerated financial liabilities (Leliq, repo agreements, and others) include the remaining 74.8%, totalling $25.5 trillion.
When evaluating the relationship between monetary liabilities and reserves (incorporating the disbursement from the IMF), a valuation of $820 is attained. The parallel market reached this level but encountered resistance and initiated a reversal.
At a certain point, the funds provided by the IMF will no longer be present in the reserves, as they were loaned to cover forthcoming obligations. Furthermore, monetary liabilities are increasing at 209% annually due to the Central Bank’s non-payment of interest. This action could precipitate a currency crisis unless structural reforms are promptly enacted.
As of August 15, the net equity of the Central Bank is estimated at $27.544 billion. However, this value can be questioned because the Central Bank holds securities valued at $99.029 billion in its assets, assessed at 100% of their nominal value, even though they do not surpass 35% in an optimistic market scenario.
On the other hand, temporary advances to the treasury amount to $13.117 billion. Considering a projected fiscal deficit of 5% this year, servicing this debt will prove challenging.
If the securities are valued at 35% of their nominal value, the Central Bank should reduce the value of its assets to $64.369 billion. This would result in a negative net equity of $36.825 billion for the Central Bank.
Immediate removal of exchange controls by the next administration appears implausible. Furthermore, a sufficient quantity of dollars in reserve to meet market demand is lacking. Again, under these suppositions, dollarisation cannot be contemplated.
The market awaits forthcoming determinations, particularly concerning the economic outlook under a potential Milei presidency, which would likely be much more tempered than the rhetoric employed to secure votes. In exchange, the Central Bank persists with its interventions and currency purchases, vigilant of reserves and the capacity to sustain the exchange rate in the forthcoming months.
In conclusion, the measures announced by Massa give rise to more economic challenges than solutions amid the complex financial situation of the country. The attainment of fiscal and monetary targets, stability of reserves, and prospects for exchange rate policies are central concerns that continue to preoccupy the financial market, with all eyes fixed on the possibility of a Milei presidency and its potential impact on the economy.
The Impractical and Inconvenient Dollarization
The electoral outcome has transformed the theoretical discourse surrounding dollarisation into a dubious governmental plan for 2024. This plan, grounded in the slogan of «satisfying the popular demand for dollars instead of pesos» and the consequent restructuring of the Central Bank, necessitates the formulation of concrete steps towards its implementation.
There are severe reservations and doubts about the feasibility of enacting such reforms. It becomes imperative to examine the cumulative consequences alongside other outcomes stemming from the execution of strategies aimed at curbing or eliminating inflation. These indeed constitute the central pillars of the economic discourse to be undertaken.
To comprehend this analysis, it seems necessary, once again, to define the concept of Liquidity Letters or Leliqs issued by the Central Bank (BCRA).
This understanding is crucial because the massive issuance of currency—undertaken as this government continues to do with the new and ethically questionable Platita Plan—sees this newly minted currency being used to cover expenses that cannot be met through other means, given the insufficient tax revenue.
In other words, a fiscal deficit is addressed by issuing these pesos as private sector loans fall short, and there is no access to any different market.
Two out of every three pesos issued—once the government’s inescapable obligations to its security, education, and health heavily affected pensions (which have seen 40% of their purchasing power eroded in less than a year), and its dubious massive aid plans are fulfilled—end up in banks as deposits (they would be converted to dollars if there were no capital controls and if reserves existed).
If banks could lend these funds again, the resulting impact would be so substantial that it would trigger hyperinflation instantly.
The banks have received this money as deposits from the public, paying an interest rate for what they’ve captured. Consequently, since it is necessary to prevent banks from lending out this money sourced from issuance, they need to compensate for what they’ve paid.
The cost of issuing money and its subsequent «sterilisation» through issuance amounts to $1.8 trillion per month (approximately $2.8 billion) for interest payments, as the rate is 120% annually on $19 billion (around $30 billion), using an exchange rate of $645 per dollar.
This cycle creates a constant accumulation of pesos, exacerbating the economy’s inflationary growth.
The massive, uncontrolled issuance of pesos to finance the fiscal deficit contrasts starkly with low money demand—meaning the population and other economic agents do not «demand» or wish to hold pesos. Hence, most of the issued pesos are channelled into deposits and other remunerated instruments, as they find no avenue for investment.
In this context, banking entities are compelled to surrender a significant portion (almost two-thirds of clients’ local currency deposits) to the BCRA through these remunerated liabilities (Leliqs and repo agreements) offered by the BCRA.
This dynamic, amplified by the rise in interest rates, directly affects the macro economy and hampers any short-term stabilisation prospects.
Currently, the monetary base—which encompasses the money in circulation held by the public and the liquidity maintained by banks—amounts to $6.5 trillion. This implies that, solely through the necessary issuance prompted by interest payments on remunerated liabilities, the BCRA doubles the monetary base every three months.
The interest rate has been increased to control inflation—a strategy that generates money issuance and exacerbates the issue above. The money issuance is used to pay interest and withdraw funds from circulation, but this action, in turn, necessitates an even greater distribution of pesos. This has engendered a latent inflation outlook for the future, which is highly challenging to defuse, thus raising questions about long-term inflation policies.
The outcome will be an excessive accumulation of pesos, fueling inflation expectations. This dynamic severely complicates short-term macroeconomic stabilisation and underscores the need for more balanced financial strategies.
This is why an impractical push for dollarisation has begun, particularly for electoral purposes.
Considerations on Dollarization: Once largely theoretical, the concept of dollarisation has become a focal point of political discourse. Dollarisation entails exchanging pesos for dollars through an agreement with the Federal Reserve, alongside the extension of jurisdiction over all existing contracts in Argentina.
The implementation and timeline of this measure remain ambiguous, generating uncertainties regarding its execution. Furthermore, the challenge of neutralising remunerated liabilities of the Central Bank and a significant quantity of circulating pesos, coupled with the need to restructure contracts denominated in pesos, significantly complicates any transition to dollarisation.
Arguments in Favor of Dollarization: Advocates for dollarisation suggest that the necessary dollars to support this transition are available within the current balance of the Central Bank. They arbitrarily estimate that $10 billion is required to replace the monetary base and $30 billion to redeem Leliqs (Liquidity Letters). This estimation rests on the assumption of a dollar value of $645. It presumes that net negative reserves are a theoretical notion that does not account for the fungibility of money—i.e., that money can only be used once.
Moreover, there is a reliance on the existence of «high-risk funds» willing to lend the necessary $30 billion to exchange for the Central Bank’s remunerated liabilities—these Leliqs held by banks, which we have previously described.
Critical Analysis and Risks: Optimistic estimations and a simplified view of dollarisation have given rise to severe criticisms and concerns. The dollarisation approach rests on dollar-denominated assets, neglecting to account for liabilities, potentially yielding an incomplete and possibly perilous analysis—a simplistic, disproportionately optimistic, and slippery path.
It is argued that the Central Bank’s balance holds the dollars needed to back the monetary base, yet this considers dollar assets without weighing the liabilities, not the liquid ones.
This is akin to taking dollars that aren’t one’s own (those in the BCRA’s assets) and not acknowledging the Central Bank’s debts. Moreover, the proposal disregards the potential resistance to dollarisation from many sectors of the economy.
Implementing dollarisation within this context poses numerous issues. The negative reserves at the Central Bank and the excess pesos—much of which are generating interest and expanding the monetary base—mean that dollarisation entails a drastic reduction of circulating pesos or a restructuring of contracts denominated in pesos, such as fixed-term deposits akin to the Bonex Plan.
Even with all these assumptions, the dollar resulting from dollarisation would be 100% more expensive than the official exchange rate. According to those advocating for dollarisation, the $30 billion would come from issuing $60 billion worth of dollar-denominated bonds into the market (assuming their price would rise to 50% of par), which currently constitute part of the internal debt held by the BCRA.
Technically and practically, it is evident that dollarisation under current conditions is not feasible, nor is it reasonable to expend time analysing it. It would necessitate aligning all corporations and interests and having a proven, capable, reliable government, which would take a substantial amount of time, aside from reaching an export level exceeding $150 billion annually and re-entering the international financial market.
Experiences and Lessons Learned: The Convertibility Plan experience in Argentina exemplifies the costs and problems associated with a dollarisation approach. Although the initial adoption of this exchange rate rule helped control hyperinflation, it led to competitiveness issues and inflationary pressures. It couldn’t be sustained due to the inability to maintain genuine fiscal surpluses. Inflationary inertia, the difficulty of breaking rigid dollar-denominated contracts, and the lack of resources post-privatization of many companies resulted in the abandonment of Convertibility. This outcome could have been avoided with capable policymakers.
Conclusion: While dollarisation can encourage discipline, it doesn’t offer guarantees. The government would retain the capacity to incur debt (in dollars) beyond what it can repay. And the bill would come due at some point, not in the form of chronic high inflation, but as outright debt default and all associated costs.
Governments that responsibly manage taxes and expenditures don’t need to dollarise their economies. Those who can’t will continue mismanaging things with or without their Central Bank.
The question we must ask politicians isn’t whether dollarisation makes sense for the country but whether we can trust them to provide sound economic judgment in their proposals. If the financial markets’ response to Milei’s victory in the primaries is any indication, the market’s answer for him is no.