In the middle, the political part: two political defeats for the Government last week with the decree that gave funds to the SIDE, added to the pension reform and the possibility of a veto, presented a greater risk for the Government and a sign of weakness given its minority situation in the legislative sphere. The conditions do not seem to be right either politically or economically. What is the city seeing?
Prices: Is the disinflation process at risk?
“Getting out of the trap implies a devaluation of greater demand in a market that would not have more supply from the reserves, and also because the process to slow down inflation has been incorporating this real exchange rate appreciation month by month, in an official devaluation rate of 2% for which the exchange rate is a little more appreciated every month, that can still be endured. It guarantees you exactly the conditions so that the government can do this and not explode, but a distortion accumulates there.“, explained Martín Kalos, Director of Epyca Consultants at FM Milenium.
That is to say, the Government still has room to maintain the crawling peg without putting the disinflation process at risk. But accumulating reserves? That is another story.
Reserves under pressure
For FyMA“the market is getting anxious”. “Without changes” to the exchange rate scheme, current reserves could worsen to negative US$8 billion by the end of 2024. “The market has not yet priced the end of the currency controls in 2024. We think that it would be a more desirable scenario since we think that the cost of leaving the currency controls in terms of inflation and activity is lower than what is imagined,” estimated Fernando Marull’s consultancy.
Last week, the Government intervened again in financial dollars, although at a “smaller” volume. The situation was controlled because the BCRA was a net buyer in the MULC due to two factors according to Consultatio:
1. The lower demand for foreign currency from the energy sector
2. The delay in payments by importers in view of the imminent reduction of the PAIS Tax. For the consultancy, “this performance has an expiration date due to the modification in the MULC access scheme.”
In a complex seasonal context in terms of reserves, lifting the restrictions would not seem to be a good option for the government.
Political risk
For Econviews, the The end of the currency controls depends more on politics than on economics“They record benefits and quantify costs. But politics is another business. Milei’s biggest political concern today seems to be the issue of inflationary rebound. He accumulated credentials by lowering monthly inflation from 25% to 4% and fears that a month of 8% or 7% will burn his popularity,” he analyzed and made a warning: “procrastination can generate temporary relief but the risk of breaking out of the trap by force would increase.”
The consultancy firm forecasts growth of 5% in 2025 without cepor “assuming as the most likely scenario that it is lifted in the fourth quarteralthough it could also be in the first of 2025. But for that to happen, political analysis has to go hand in hand with economic risks. We are optimistic about Argentina. We believe that, just as Milei took risks with the adjustment that led to a strong fiscal surplus and it turned out well, it is time to take a political risk (smaller than the one taken in December) to get out of the trap. And that victory will probably tame all those who push for more public spending in Congress.”
The supply of dollars is under pressure
While the Money laundering is slower than expected For the Government, the supply of dollars from the agricultural sector is going through a bad patch. The price of grains and their industrial derivatives has fallen to a four-year low. This undoubtedly puts another condition on the lifting of the exchange rate restriction in the short term.
“The fall in soybean prices impacts Argentina’s reserves as producers find fewer incentives to sell off the harvest. How many fewer dollars would enter the state’s coffers for this reason? Industry sources say that income could be reduced by between $5 billion and $7.7 billion,” estimated a report from Wise Capital.
“We understand that it would be crucial to resume the generating a significant foreign exchange surplus almost every month to calm things down; this could require adjustments in exchange rate and fiscal matters, which have been the norm at all national and intellectual levels,” said a report by VatNet Financial Research.
Source: Ambito
