Moody’s vice president, Jaime Reusche, He spoke with Scopefrom its offices in New York for almost an hour, on the march of the Argentine economy. He praised the direction of the Government, but warned difficulties to accumulate reservations and generate trust.
He highlighted at least three opportunities the importance assigned by the market to the mid -term elections and considered “transitory” to the scheme of exchange bands. He also talked about the rise of rates, the jump of the dollar, the qualification of Argentina and the possibility of a return to the markets.
Journalist: A Moody’s a month ago improved Argentina’s qualification in the international market and also in the premises: What does that mean for the country?
Jaime Reusche: We raise the qualification in two steps and Argentina was slightly below what is typically considered a rating that is consistent with sovereigns that access the market. The rise reflected the improvements we are seeing, the program with the IMF, the fulfillment of the objectives of the program except for the accumulation of the reserves and the reduction of capital and exchange rate controls. However, we have maintained the stable perspective because we still have some doubts regarding the ability to accumulate reservations. While there are good prospects, we are still worried that there is or that some shock is given in the adjustment that is being given. And that typically goes through the political part.
JR: At the moment things are going well, but we have decided to stop here to evaluate how external finances follow here until the end of the year and whether or not there is a political shock. That is basically what the stable perspective is indicating. If we had left the qualification with a positive perspective, we would say that there is still room to continue going up here at the end of the year. But the stable perspective what he tells us is we are going to reconsider, we are going to stop a little. This is a good stopping point. We are going to study what happens for the part of the elections, the confidence of the private sector and international markets and what happens with external finances.
Q: Why do you think the investment process is not accelerated?
JR: Investors are waiting, they are on hold. They want to see if political signals are consistent with this adjustment process. It is difficult to accumulate reserves endogenous at this time without attracting capital flows due to the fact that the economy is in a recovery process. If there was a time when reservations could be accumulated in an endogenous way, it was last year when the economy was contracting. That window closed and it is key to generate confidence from both international and premises markets because something that differentiates Argentina is the level of wealth of Argentines, from the savings that are still outside the country and that can flow inwards, it is estimated that there are approximately 200,000 million dollars from Argentines outside the system.
Q: Do the band scheme see it as something permanent or transitory?
JR: According to what we have understood from the government and also from what the Monetary Fund asks for, we understand that it is a transitory mechanism and that it should eventually migrate to a flotation without the bands. The bands give some flexibility, but at the same time they also restrict the margin of maneuver a bit because what we have seen in recent days is that the exchange rate has increased, that we see it as something healthy, so that it is looking for a new balance. But if it comes to run into the upper band, that does quite complicated the management of reserves and the management of all macroeconomic groups because there is always that psychological limitation of the citizen that is afraid of continuous devaluations. That band tries to install some confidence, but at the same time it is a double -edged sword, so we believe that the authorities would also want to start moving the band a little more without generating shocks in the local market, so that the exchange rate can look for a true balance that makes external finances fit.
Q: Can the current equilibrium exchange rate be considered?
JR: It is a process. You have to see what happens once they finish dismantling capital controls and that begins to flow more foreign capital towards the country, that is where we will most likely begin to look for a total level of balance where there are less distortions. It is difficult to talk about a balance exchange rate when you still have restrictions on the exchange part, in the capital control part and when there is still a financial system where liquidity is stuck no longer flows.
Q: How sustainable is this level of interest rates for the real economy?
JR: Financial mechanisms are still adapting to this adjustment process. We have a lot of volatility in liquidity conditions. We went from a moment at the end of last year where there was significant liquidity, that generated that the credit begins to grow at rates of 40% in real terms already mid -year and now more recently we notice a lack that necessarily generates an increase in the real rate and are intertemporal movements that we will most likely continue to see during this process. If more capitals arrive there will be more liquidity in the local market depending on the fiscal position that also greatly affects the availability of liquidity in the local market, if the government can maintain the financial surplus because as debt is withdrawn or making less rollover that supports the position of liquidity to local banks a bit. We will continue to see volatility in this process and it is basically normal as the foundations of a stronger monetary system are being built.
Q: Can a return from Argentina more consistent to international markets occur in the short term?
JR: Our base scenario contemplated that Argentina return to the markets to be able to capture more currencies this year and that was one of the mechanisms through which reservations were to be accumulated. It is a temporary mechanism that is typically suboptimal, but when the program came with the Monetary Fund, the truth that surprised the amount. We expected it to be a quite lower amount and what this program has given is a lot of reservations so that the Central Bank can maintain this adjustment process. That changed the base stage. We no longer contemplate that Argentina goes to markets this year because it doesn’t really need it. The question is whether the reservation level will be maintained. Because if we begin to see what they fall, and an indicator will be what happens throughout this year, then it would be necessary to go out to international markets.
Q: What events do the market carefully observe with respect to Argentina?
JR: The vast majority of economic actors are waiting for the October elections. More than anything to have an idea of how Congress will be configured and if the government will be able to maintain this agenda of reforms and macroeconomic adjustment. We know that the government will win some land in Congress, that is already the base scenario of many, but what is not clear is how much land will win, what constitutes a good surprise or a good result or a bad result.
Q: And what impact do you think the choice can have?
JR: It is strange that so much attention is being paid to a mid -term choice. The adjustment is on the right track, it is still missing, it will be a process. It is an adjustment that has better foundations than others that we have seen in Argentina, but beyond all risks, if there is a risk that can derail the adjustment is a political shock. Outside that, there is a very marked will of the government to maintain adjustment at all costs.
Q: About eleven months Moody’s had within its stage the possibility of a restructuring: is it still a possibility?
JR: We are wrong, the government insists that it does not want to make a restructuring but continues with the limitation of the endogenous accumulation of reserves, so there is always the possibility of a slightly more friendly distribution where the government may seek to extend the amortizations the repayments of the main debt in exchange for the credibility it has gained. I think they did not do it at the beginning because they wanted to differentiate themselves from the other governments that typically every time there is an adjustment process they say good, no, now this adjustment process will be given, take our hands, help us and from there we start the adjustment. Here it seems that it has been the other way around, the intention of the government seems to be first to make the adjustment to gain credibility, so that it will see the market that effectively goes seriously and then see if there is voluntarily there is the possibility of impacting the debt. We still do not know what the government’s position is but it is something that limits the margin of maneuver of all these principal payments and external debt, so we are being very cautious with the qualification.
Q: What expectations do you have with respect to rates in the US?
JR: Our base scenario is still that it will be a very gradual process, there may be a cut or two towards the end of the year. But we see a very gradual process because inflation in the US persists, it is still outside that inflationary goal.
Source: Ambito
