Not all moons are honeymoons

Not all moons are honeymoons
Not all moons are honeymoons

180 days since its start back in December 2023, The government maintains its position on the internal origin of the imbalances to be correctedalthough postponing (sometimes changing) several of the pillars of what continues to be a transition scheme that can be divided into three well-differentiated stages.


The scheme started with a strong devaluation of the official exchange rate, which gave air to the government through two channels. On the one hand, it reduced the gap and eliminated part of the incentives that contribute to demanding reserves. On the other hand, nominal wages did not increase in the same proportion as prices, so the fall in demand contributed to reducing GDP, and making it converge well below the maximum product that the balance of payments allows. It bought time.

At the same time Both the National Treasury and the Central Bank have been coordinating the management of negative interest rates which, given the stocks, has forced the agents to look ahead. Chainsaw, blender and bicycle (both to State suppliers and importers) allowed the BCRA not only to eliminate financing to the Treasury but also to reduce the weight of remunerated liabilities with respect to GDP.

In this way, with less effective demand, the exchange gap was at a minimum, the real exchange rate was high (which represented an incentive to liquidate exports, energy first, agriculture later), and part of the foreign exchange market demandthe monetary authority managed to buy reserves rapidly, which helped anchor short-term expectations and prevent the correction from leading to chaotic dynamics.

Everything has an end

One of the pillars of the transition was set a crawling peg around 2% monthly, which was maintained regardless of the initial level and the subsequent dynamics of inflation. Given the exogenous component of regulated goods and services, this generated a strong exchange rate appreciation that has reduced incentives to liquidate in the short term. This, combined with a series of drops in interest rates, generated a series of tensions that finally gave rise to a jump in financial dollars and a sharp increase in the gap, which is now well above 40%. And this is where the government has become enclosed in its own labyrinth, clinging to two elements that it needs to get rid of, it is not clear how and they are beginning to take their toll: the stocks and the recession.

On the one hand, this was limiting the original incentives for the supply of dollars, while demand was regaining space and ended up once again taking out of the market to the BCRA, at a time of the year when the field should be liquidating more rapidly. At the same time, the market seems to have placed a very specific limit on the low rate policy, something that the BCRA seems to have already taken note of.

With expectations (exchange rate first, and inflation later) ultimately rest on the evolution of international reserves, the very progress of a transition that was adding tensions madeand the current exchange rate rule begins to leaklimiting the possibilities of getting out of the labyrinth without a new exchange rate correction.

And although it is very likely that the lower existing nominal value will improve the credit conditions of the economy, the fact that the forced savings process It will make the recovery (although heterogeneous) come into direct contradiction with the little existing external space. So much denial that the only restriction is the budgetary one to end the honeymoon by seeking to moderate (via the IMF, Elon Musk or the RIGI) the much maligned external restriction. Mandinka thing.

May the light at the end of the tunnel not be a train in front

Without an open financial account, product growth was, is and will always be limited by the availability of net foreign exchange generated by exports, discounting the demand for dollars for the payment of imports, freight, services, interest and debt cancellationspublic and private, commercial and financial.

And the recession, although necessary to stretch the transition, will have increasing costs. According to estimates we made at CECA, the level of activity (EMAE) contracted in April for the seventh consecutive month (2.7% compared to March).accumulating an annual drop that exceeds 6%. And with the exception of the sectors associated with agriculture (which recovers ground after the drought of 2023) and hydrocarbons, most of the branches remain in negative territory, with increasing intensity depending on the dependence of each activity on demand from the market. internal.

The latter is also key to account for the labor market dynamics, given the procyclical nature of both employment and wages. Regarding the first and in accordance with own projections, the fall in registered employment deepened in April, reaching 2.9% yoy. The registered real private salary (SIPA), for its part, only managed to recover a little more than 6pp of the more than 11pp it lost in the megadevaluation last December.

In this way, what the scheme provides in the form of a sharp real drop in spending (over 30% yoy in the accumulated annual) is partly returning in lower income, in the case of taxes of the order of -5.4 % ai. real, led by profits (-37.6% ia., duties on imports (-21.7%) and contributions and contributions to social security (-18.8%), while dependence on the country tax grows.

There is no magic. Given the magnitude, duration and recurrence of macroeconomic imbalances in Argentina, there is no way to move towards a true stabilization scheme without recovering and strengthening the currency. The greater the demand for pesos, the easier it will be to think about a new monetary regime. It is also true that financial dominance and distribution conflict will be important obstacles when considering the leap.

For us, the exit continues to be with stabilization, but on an agenda that includes ccombine economic growth and structural change. Effective demand, scale, technological innovation and industrial policy, elements currently absent in the government’s discourse and program.

By Sergio Adrián Woyecheszen, CECA economist, former BCRA Vice President

Source: Ambito

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