Coordinating Director of the Capital Foundation
As early as July, the BCRA’s exchange balance indicated the need for exchange rate measures. The dollar sales of the monetary authority and especially the change in trend compared to June, justified the action at that time. To make matters worse, the situation throughout August and in the first half of September became complicated, and only on the 15 exchange decisions were made; which by the way were “delayed”. They were also uncoordinated and, the worst thing, is that they were wrong, insisting on partial decisions (only restrictions on the demand for foreign exchange in the official market), which they sought more calming than solving the underlying problem. Not only was the exchange gap sacrificed, but also by forcing the restructuring of private debt, the country risk increased and deposits in dollars fell, in addition to sacrificing international reserves of more than US $ 1 billion. And the most conclusive proof of the mistake is that new measures were resolved, trying on the one hand to improve the level of international reserves (either by lowering withholdings or by the use of commercial yuan) and on the other hand to strengthen the demand for money, by through the rise in the short-term interest rate and via new Treasury instruments that are acquired by investors in domestic currency. The decisions of October 1, are far from the restrictive nature of those adopted on 9/15, now It was sought to encourage the supply of dollars and the demand for pesos; although they are “deficient”, either because of their very mild intensity, or because the passage of time makes them insufficient to reverse the accumulated mistrust. And this explains why reserves, gaps and country risk have not improved in the first days of the current month.
Economic scenarios and risks
The “base” scenario that Argentina has ahead is a “2011/2015, reloaded”. Both in that period and at present there was no remittance of profits, with restrictions on imports. The tourist dollar today is the solidarity dollar, with tax surcharges, both. And in the present it is “recharged”, since the current government does not have the boxes (BCRA reserves, ANSES resources) that were used during 2011-2015. We are talking about a stage of low economic growth and high nominality.
Now, if we want to stress the analysis, calibrating the possible risks, the current conditions they are not suitable for hyperinflation, a potential process of this type does not happen quickly. Neither can a default of the public debt be expected, since it was recently restructured with the private sector and is in the process of being settled with the International Monetary Fund. On the one hand, the Argentine financial system does not present a currency mismatch, so there is no need for compulsive de-dollarization. Today, the borrowed dollars have repayment capacity in that currency. On the other hand, banks have lost almost 50% of their deposits in dollars during the last 14 months, and yet the liquidity or cash to face them went from 60% in August 2019 to 90% today. Financial entities have funds that represent practically lto all deposits in foreign currency.
With the different risks limited (hyperinflation, retained deposits, default and compulsive de-dollarization), there remains a risk that, unfortunately, is not less. And it is the risk of devaluation. On the one hand, the current level of net international reserves is really low, they have been falling and have fallen more than 50% so far this year, and looking at the exchange gap in the future, it does not help. On the other hand, the projection of the exchange balance for the coming months, under the conditions of present confidence, will hardly improve the position of international reserves. And a potential devaluation, disorderly and without plan, combined with a delicate social situation and a stagnant economy during the last decade, can be a very dangerous cocktail.
What to do then: projections, steps and actions
The government wants avoid a devaluation, like the one from 2014. Although it is not only “wanting”, it is also “power”. As the Budget project was wasted due to the misguided exchange rate measures of September 15, a joint and coordinated action of the Ministry of Economy and the BCRA, clearing all the economic fronts (the fiscal, the monetary, the external) within the scope of the Congress. For this, they would have to present the Financial Program of the national public sector, the Monetary Program and the Projection of the Exchange Balance, all together. The procedures have to attend 3 actors, looking for dollars. Trying to activate the swap with the Bank of China, talking and seeing what stimuli the Argentine export sector requires; while, perhaps another type of Agreement with the IMF (more ambitious) is needed, extending terms, obtaining fresh money and mainly signing it as soon as possible.
Regarding the shares, if what is sought is that there are no shortage of dollars, in the exchange field, the economic authorities would have to deepen incentives to increase the supply of dollars, instead of insisting on the vicious circle of restrictions on access to the official exchange market. They should keep the currency stocks and go narrowing the exchange rate gap, and not fall into the trap of an anticipated formal doubling, with a financial dollar that tends to infinity. On the other hand, if what is also wanted is that there are no extra pesos, first they would have to maximize public sector financing in pesos through the capital market, minimizing the use of the BCRA, which had an excessive participation during the course of the year. It is important to take care of the balance of the financial system, not occupying its assets with public risk, both in financing the Treasury, and in the necessary credit assistance to the micro, small and medium-sized companies sector. Another aspect to consider on the monetary front is the need to have a monetary program, guaranteeing a passive interest rate that is positive in real terms, and that compromises a certain nominal evolution of monetary aggregates (It could be M2), leaving aside extreme positions, such as the “zero” variation of the monetary base, or what it would be like to have no nominal projection on the monetary aggregates.
Finally and how priority condition From the construction of confidence in Argentina, it is essential that the political leadership (both the ruling party and the opposition) commit to the development of an exchange, monetary and fiscal policy that becomes “State policy”, replicating the practices of the countries of the region, which show much better results than Argentina so far in the 21st century.