What does the market expect to happen to the dollar in Argentina and how can it impact Uruguay?

What does the market expect to happen to the dollar in Argentina and how can it impact Uruguay?

Javier Milei was elected president of the Argentina yesterday with the majority of the votes, a result that generates uncertainties regarding the economic measures that the president-elect would implement once in command and how it would affect the Uruguayan economy.

The neighboring country underwent the presidential elections – in terms of runoff – between the leader of Libertad Avanza, Javier Milei and the current Minister of Economy of Argentina, Sergio Massa. The results were more overwhelming than most polls expected with 55.69% for Milei compared to the 44.30% obtained by Massa.

Expectations for the dollar

The president-elect’s actions could lead to two scenarios different. The first, according to the consultant Romano Group consulted by Argentina Areaestablishes that Milei would propose a fiscal adjustment of 5% of GDP – through the reduction of public spending –, as well as the structural modification of the State and a dollarization of the economy.

“We don’t see any major problems in them being able to obtain the dollars necessary to rescue the monetary base, at current CCL values, approximately US$8.4 billion, but what generates greater uncertainty in the market is the management and conversion of Leliqs and Pases (remunerated liabilities), which at current values ​​represent around US$27 ,000 million (of which 55% corresponds to Private Banks and 3% to FCI),” the report established.

Meanwhile, in the event that the market does not trust Milei’s plan, there could be a very high exchange rate, although the consulting firm highlighted that it is necessary to pay attention to the transition. “It is important to highlight that without a doubt we believe that the economic proposal as a whole will be a shock and They will not go to fiscal or monetary gradualisms. The exit from the exchange rate could be imminent and despite the fact that the Minister of Economy, Sergio Massa, wants to avoid devaluation, we believe that the market will twist his arm,” the report highlighted.

Regarding the economic and financial consequences, they established that “Dollarize with FX so high that it implies probable hyperinflation during the transition towards the new regime.” On the other hand, they established that “the banks would suffer considerable losses due to their peso bonds (Dollarization involves converting securities in pesos that are quoted at parities of 90% into securities in dollars that are quoted at 30% and today the public titles ex Leliq represent more than 60% of the net assets of private banks), and the risk of bank runs would increase due to the consolidation of reserves in dollars and pesos (today banks have availability in dollars for US$13.8 billion, including reserves )”.

Meanwhile, the other scenario in which dollarization is not achieved, according to the consulting firm 1816, is not going to be easier either. “It is that a plan of alternative stabilization (which, to be successful, would necessarily require the market and savers to trust the local currency) would have its credibility inevitably undermined by Milei’s historical stance on the peso. If, as part of an alternative program, by adjusting relative prices the inflation rises to the 30% monthly zone (something likely, given the magnitude of the current imbalances), the market will doubt whether Milei would not end up preferring to dollarize2,” established the consulting firm.

“The only good thing about this plan is that it would have the support of the PRO. The bad thing is that, even if it works, Argentina would have very high inflation at least until the legislative elections of 2025,” said the same consultant.

The price gap between Uruguay and Argentina at its historical maximum

The price gap with Argentina reached its highest historical value since the UCU Economic Observatory in Salto The measurement is carried out (2015), reaching 180% in September, driven by the strong devaluation experienced by the neighboring country after the PASO elections in August.

It should be noted that this percentage, for which the Catholic University of Uruguay takes the monthly average of the price of the blue dollar as a basis, did not include the historical peak of 1,000 pesos in October so, in fact, the gap is greater .

“We hope that the situation in Argentina continue to deteriorate next year. Although they differ in the possible measures to be implemented, there is no immediate way out of the current situation, so as it continues to worsen, the effects on Uruguay “they will continue to feel,” he considered. Florencia Zufiría, economist in the Economic Analysis and Projections Service area of CPA Ferrerein dialogue with Ambit.

For its part, Ignacio Umpiérrez, economist at the Center for Development Studies (CED)considered that “a stabilization plan credible that combines a nominal anchor (the exchange rate) and a real anchor (fiscal adjustment), after unification of the exchange market and an honesty of rates”, added to the fact that the next president ensures the governance policy, should direct the situation in Argentina.

However, if this scenario were to come true, the specialist remarked on his Twitter account: “I insist that we must internalize that our neighbor is and will be a significantly more impoverished and cheaper economy than Uruguay. Perhaps what made the non-tradables tradable will slow down, but I tend to believe that the exchange gap will continue to be high.”

Source: Ambito

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