The election passed and the only changes in economic policy occurred in the administration of exchange policy, without major news on the rest of the fronts. In a context of deteriorated credibility and proven policy procrastination (above all, the negotiation to restructure private debt), the promise of a multi-year plan knows little for the market. The challenges are multiple and the government is likely to be aware of this, but it seems that it will take things “at its own pace.” The risk is that the times of the market are not usually those of the policy. The agreement with the Monetary Fund, which will attack the fiscal, monetary and foreign exchange fronts, has a March 21 deadline, but the low stock of net reserves may force the government to reach an agreement earlier.
Post Election Week
On the very Monday after the election, the Central Bank gave two eloquent signs of a change in the exchange policy strategy: i) a new approach to reserve “management”, with an impact on the price of financial dollars and ii) a random walk (random path or “drunkard’s walk” in economic theory) for the rate of rise of the official exchange rate.
The easiest to understand was the new administration of reserves used by the monetary authority, which had as its distinctive feature a “closing of the tap” of financial dollars, while in the MULC it had to continue supplying import demand. In the MULC, the BCRA had no alternative but to continue supplying a strong private demand that averaged USD 562 million versus USD 616 million last week. This led to official sales of USD 117 million to cover the imbalance between private supply and demand, down significantly from USD 634 last week. At this window, the BCRA must face a growing “import dominance” given the implicit subsidy offered by the exchange gap of over 110%.
Subordinate to this “dominance”, the Central Bank had no choice but to stop intervening in financial dollars, which was the other “tap” through which it was losing reserves. Given the shortage of liquid net reserves (around USD 630 million as of 11/19), there was no room for this strategy to continue. This intervention strategy had been costing the BCRA about USD 2,068 million between October 2020 and September 2021 (latest figure) and, according to our estimates, about USD 367 million in October and USD 348 million as of November 12, totaling US $ 2,784 million. When the monetary authority ran away from the buying point (which implied losing reserves) of the AL30D and AL30C bonds (Bonares, local law), prices fell sharply 6.6% and 8.6% last Tuesday, causing interest rates to jump. implicit exchange rates with these bonds and, consequently, converging with the MEP and CCL dollars with GD30 (Global, foreign law) above $ 200. This implied the end of the intervention in the MEP and CCL financial dollars with the AL30, whose initial purpose (in October 2020) had been to contain the exchange gap and which, given the successive restrictions implemented, ended up creating “the gap of the gap” (The dollar MEP with AL30 was trading at $ 180 and the MEP with GD30 at $ 200).
In contrast to the expected management of the scarce reserves, the change in the rate of rise of the official dollar (crawling peg) left the market somewhat baffled. Until the Friday prior to the election, the entity led by Miguel Pesce the exchange rate had been moving about three cents a day, equivalent to an annual rate of 11%. On Monday it rose 7 cents (instead of the 9 that it usually rose on weekends), on Tuesday it rose 2 cents and Wednesday and Thursday 5 cents.
This is equivalent to saying that the first two days of the week the BCRA was raising the exchange rate at a rate of 7.8% and 6% annually and Wednesday and Thursday at a rate of 17.4%. A true random path. The official strategy would have been to generate some uncertainty about the acceleration of the crawling peg, taking it from a slower pace to the pre-election to a faster one in the same week, when the market discovers that there is no other alternative than an acceleration to a level much higher than 11% (when inflation runs at 50% per year) .
How’s everything going?
The market believes that the acceleration of crawling peg It is a fact, but it is not clear how much or, fundamentally, how. It is clear that an exchange rate gap greater than 110% (it was one month above 100% this week) and a multilateral real exchange rate that has appreciated almost 17% so far in 2021 and is already below pre levels. -January 2014 devaluation puts pressure on a squalid stock of net liquid reserves. Since the situation is unsustainable for several weeks, immediate moves are expected.
The BCRA would begin to move the official exchange rate at a rate of 3% or 4% per month (similar to inflation) with the intention of buying part of the December wheat harvest, which would reach US $ 2.2 billion, and so on. rebuild reserves. Not everything is so easy: if the interest rate is not aligned with that of the crawling peg, perverse incentives will be generated on foreign trade. If the interest rate is lower than that of the rise in the official dollar, the grain producer would prefer to keep the grain (which would appreciate at a rate of 3% or 4%) while in pesos it would have a monthly rate of 2, 8% if we are guided by the current BADLAR of 34% of TNA. In the same way, importers would accelerate their purchases abroad, since staying in pesos would yield 2.8% per month, when they know that the products they want to import would rise at a rate of 3% / 4% per month. Therefore, aligning both rates would imply raising the interest rate, which is a by-product of the monetary policy rate. As an example, a BADLAR of 4% per month is equivalent to a TNA of 48% (increase of 14 percentage points), which in turn would derive from a rise in the TNA of the LELIQ to 53% (increase of 15 percentage points compared to the current rate of 38%). It sounds a bit far-fetched that the BCRA would validate a rate adjustment of such caliber given that: i) the quasi-fiscal deficit would inflate and ii) interest rates for the entire economy would rise, making both the cost of financing the Treasury deficit and that of the private sector, which would suffer economic activity, so it is expected that it will “lead” it. This strategy would imply some minor rise in the interest rate, perhaps softening the rise in the crawling peg to the 3% zone (if inflation is 4%, the real exchange rate continues to lag!) and wait for the BCRA to buy some reserves. The risk is that, if this does not happen, there is no other option than a slight jump in the exchange rate.
Here the question arises as to whether a possible discrete exchange rate jump would have the endorsement of the International Monetary Fund. In order to anchor expectations, it would be prudent that, in the event of a devaluation, it is supported by a solid fiscal and monetary program with the body that anchors expectations (or at least does not unanch them more than they already are) so that nominality is not spiralize. The temporal inconsistency lies in the fact that the Argentine authorities may be negotiating arduously with the staff of the institution in Washington with a view to reaching an agreement before March 21 and that reality imposes immediate action in Buenos Aires sometime in the summer. That is why, to minimize risks, it would be more than healthy for the negotiation to close as soon as possible.