Review of rates and yields
Ending October 2024, some banks offer annual nominal rates (TNA) for fixed-term deposits in pesos of up to 42%, equivalent to a monthly effective rate (TEM) of 3.45% and an annual effective rate (TEA) of 51 .1%. Since the monthly devaluation rate is 2%, its TEA is 26.8%. In static analysis, this situation generates a return of 24.3% annually, this is the spread (difference, in this case in dollars) between the current devaluation rate and the TEA in pesos of a fixed-term deposit.
Conceptual and quantitative review of rates and returns
Ending October 2024, there are banks that pay annual nominal rates (TNA) for fixed-term deposits in pesos of 42%, which is equivalent to a monthly effective rate (TEM) 3.45%, and a TEA 51.1068%. When calculating returns, an investment of in a 30-day deposit (42% TNA) makes up a (TEA) of 51.1%. Since the current monthly devaluation rate is 2%, the TEA of the devaluation is 26.82%. In this way, the difference between the devaluation of the dollar in one year andthe TEA obtained in pesos gives a return of 24.28% in dollars, if nothing changes. That’s today’s photo, not the movie.
This incipient upward variation in interest rates reflects both the demand for credit and the banks’ deposit policies. Although the rate in pesos, in certain scenarios (such as depreciation) may not be able to overcome inflation, When compared to today’s depreciation, it outperforms the global return on a dollar time deposit (dollar fixed term) wherever it may be..
The role of the annual effective rate (TEA)
There is a significant difference between compound interest rates and simple interest rates. When money is invested at a compound interest rate, each interest payment is reinvested to earn more interest in subsequent periods. On the contrary, in an investment that only pays a simple interest rate, the opportunity to earn interest on interest is lost.
The Annual Effective Rate (TEA) allows savers to analyze their returns by simulating a monthly interest capitalization, which is advantageous for those seeking to optimize their returns. However, in a context of high inflation and potential devaluation, the real value of capital tends to erode in terms of purchasing power. Even calculating the return with the monthly reinvestment offered by the TEA, a rate of 51.1% may be insufficient to compensate for the peace lost due to being in pesos and the eventual loss of real value of the capital in the face of inflation and/or the rate of change.
Critical perspective on profitability in real terms
The offer of nominal interest rates in dollars of 24.3% seems attractive at first glance, although it is “Cositortesca” in the global economyespecially after many months of “carry trade” by the banks, which gained large amounts in dollars provided by the operations of the BCRA, now consolidated by the security it offers by nationalizing and guaranteeing the Treasury, directly.
For that reason, The performance of the new “retail bicycle” strategy must be analyzed with cautiondue to the still very high level of “country risk” and the always potential exchange rate volatility of Argentina.
When compared with the opportunity cost of investing in other assets, due to the risk arising from exchange rate delays, the very high local yield in dollars still seems insufficient to cover the danger inherent in a potential loss of value, when the static terms of stability and real performance, they do not offer unconditional security.
The fallacy of safe savings in an economy in recession
Promoting performance 24.3% in dollars could constitute a “Cositorteesque” mirage if investors are not alerted about the macroeconomic risks of a context as vulnerable as Argentina..
Although fixed-term deposits or “time deposits” represent a low-risk alternative within the global financial spectrum, in Argentina they hardly protect purchasing power against the dollar. This has been evident with the “Caputazo”, the devaluation that exceeded “the Rodrigazo” in December (118%), which shows that these financial products are sometimes insufficient to maintain capital stability in the medium term.
Those who defend compensation and the next unemployed
The small saver has additional risks due to the monthly consumption of his savings since his genuine income is not enough (perhaps he even sells the dollars he bought for $1,500 for $1,200). In addition, unemployment lurks on your desk or machine, in an economy where consumption has fallen dramatically. The industrial, construction and commerce sectors continue to show monthly declines in activity, reflecting the fragility of the real economy.
According to data from the Ministry of Labor until August, formal employment has fallen for eleven consecutive monthsstanding at the lowest level since the second quarter of 2022 and 4% below 2017 levels. This situation translates into a scenario of “recession without Keynesian alternative”. The reactivation does not coincide with the reaction manuals in the medium and long term, after the structural reforms.
An update of the exchange rate would place the dollar at $1,850 to match the competitiveness achieved in December 2023. This is the value that private consulting firms expect and that investors expect.
As we saw these days, markets tend to react favorably to expectations of change and motivated recognitions. “Prizes usually have three objectives, which may or may not coexist. The first and most noble is to entertain the winner, the second is to praise the one who rewards (in a kind of “ad Vericundiam” fallacy) and the third is to get something from the winner” (Dionisio Bosch, Ambiente.com, October 28).
Javier Milei’s government has so far only gotten loan promises from the IDB and the World Bank Group in Washington, DC, while talks with the IMF continue. However, all of them expect devaluation and structural reforms so that the improvements are sustainable.
The recent rebound in ADRs and Argentine bonds, as well as the fall in country risk, suggest conformity of course, although tangible results are required to improve flows and social stability that guarantee the continuity of policies. It must be remembered that markets always react positively to unpopular measures, even if the proposed reforms are unsustainable. It has already happened before now.
Again, so far every annoying measure for society as a whole has helped to reestablish a certain sympathy from the markets, but There is a business logic that the president and the economic team must know and it is said: “show me the money”. The strategy, “show me the money” in companies says that you still have to demonstrate that what they are doing will increase cash flows year after year, adding value to whoever comes to invest. At the moment and as we saw, in an economy in recession, with high inflation rates, an extraordinary drop in consumption and the unavoidable need to obtain US$144 billion to meet commitments of US$142 billion in 2025 ( year of mid-term elections) continues to present doubts, not only for large investors, but for the innocent savers who, attracted by novel profits in the private sector, have been “Cositorted”, “Esquemiponzeados”.
The final challenge: transforming expectations into reality
The Argentine economy faces the monumental challenge of transforming market expectations into tangible facts that restore confidence. The profitability of 24.3% in dollars is a “Cositortesca” promise if it is not accompanied by social peace, without strikes, without marches of retirees, university students and transportation strikes. All of this makes aggregate investment unfeasible.. Except for a recovery of the real economy, with social peace, savers should be cautious when deciding. The new “retail” bicycle seems trapped in the dilemma of seizing illusory returns or losing savings due to a potential devaluation.
Director of Esperanza Foundation. https://fundacionesperanza.com.ar/ UBA Postgraduate Professor and Master’s Degrees at private universities. Master in International Economic Policy, Doctor in Political Science, author of 6 books
Source: Ambito
