The government and the IMF want to delay the official exchange rate. Energy prices rise much more than agricultural prices, the exchange balance under great stress. The tourist balance would be very negative due to the World Cup. The agreement with the IMF in sight. For now, and only for now, blue dollar down.
How is the global context?
The war between Russia and Ukraine is changing the world and the consequences of this harrowing sequence of attacks and deaths will be experienced by all of us on the planet.
1) War tension is growing and all the countries of the world are going to increase their defense spending, this implies more deficit, inflation and debt.
2) The risk premium grows, this will affect the emerging world, no one wins when there is a war, everyone loses.
3) The rise in raw materials may partially benefit one sector, but harms the majority. Power generation has taken a step back, more coal is being used, given high oil and gas prices. This generates higher emissions of carbon gases, there is more pollution and climate change punishes us.
4) All this helps us to have higher inflation and therefore rates begin to climb upwards, with which asset prices adjust downwards. Present value falls when we measure future cash flow at a higher discount rate.
5) Logistics are complicated, there are new cuts in the supply chain, freight prices rise, insurance becomes more expensive and everything ends up affecting the final price of the products.
war benefits no one
Not at all, it is a setback for humanity. We want to make it very clear because many times we are asked if Argentina benefits or is harmed by this conflict. The answer is that with the conflict we are all committing suicide a little.
How is the agreement with the IMF coming?
There will be agreement at any rate, but remember that agreement is a necessary but not sufficient condition for growth.
How is inflation coming?
Inflation for February will be known on March 15, it is likely to be around 4% monthly, and for March they are projecting a figure higher than 4.5%. In this context, the Central Bank is likely to raise the short-term rate from 42.5% to 45% per year, while the fixed-term rate could go from 41.5% to 44% per year.
Is it not convenient for me to renew the fixed term and advance financing?
Correct, we do fixed terms adjusted by UVA index (inflation) to 90 days, at least until we see that inflation stabilizes and we have an interest rate at attractive levels. Regarding financing, we must try to obtain the greatest possible financing now, the banks will increase their loan exposure to the State, the private sector will be left with less financing and at a higher rate.
What happens to the official dollar?
The government plays to delay the exchange rate, under the premise that competitiveness is only measured in terms of the price of wheat, corn and soybeans, and not by the Argentine cost side. The Central Bank got the IMF to authorize a greater intervention in the futures market, therefore, it will try to discipline the price with higher sales. By the end of March it could have sold the equivalent of US$6,000 million, this amount could grow to US$7,000 million by June and US$9,000 million from September onwards. At present, the amount traded in dollar futures contracts amounts to US$3.728 million, with which there is room for a major intervention to suppress the rise in the official dollar. In 6 days of March, the official exchange rate rose 0.7%, which projects a rise of 3.5% for the 31 days of March, however, the price of the future dollar in March is $111.53 and , if the month ended at this price, the rise would be 3.1%. At this point you are dizzy, as we all are, but I would like to make it clear to you that the Central Bank is playing on the general confusion with this type of maneuver.
Then?
Apparently in January, February and so far in March, the will of the Central Bank in terms of exchange policy is to delay the exchange rate. The game is clear.
Can you explain it to me better?
According to the Market Expectations Survey of the Central Bank, inflation for the year 2022 would be around 55% per year, the interest rate is located at 42.5% per year and the devaluation rate of the last 12 months, measured as of February 28, it stands at 19.6% per year.
What does your consultant project?
It’s all in the Private Report. We notify by this means that there is an improvement in the audio service, which cannot be forwarded, to forward it ask for authorization because everything that is said there has intellectual property rights.
How will the devaluation rate be in the future?
We believe that it will continue in the same way, they will try to make the inflation rate higher than the interest rate and the interest rate higher than the devaluation rate.
Will they make it?
From our point of view I don’t think they can do it.
Why?
Argentina will go from having an energy balance with a deficit of US$646 million to a deficit of approximately US$5,818 million (everything will depend on how the price of imported gas and diesel evolves). We do not believe that exports of grains and by-products will increase in the same proportion as the energy deficit, with which dollars will be short. This could precipitate a change of plans in exchange rate policy.
Does Argentina need dollars?
Correct, the IMF will give you pieces of paper that can only be exchanged for the debt that expires with the institution itself. This agreement is different from the one made by Mauricio Macri, at that time the international organization gave him dollar bills, and now it will give him Special Drawing Rights (SDR). The Chinese will give us a swap of US$3,000 or US$5,000 million, other bits of paper that cannot be used as dollar bills. This implies that the reserves today are low, only US$ 37,106 million, and could be higher due to the incorporation of pieces of paper, but the net reserves would continue to be very low.
How much are the net reserves?
Each analyst does his or her little number, however, from these reserves, if bank reserve requirements, credits, the Deposit Insurance deposit and other concepts were deducted, we would have net reserves in balance or negative. If you deduct the gold, which you cannot divide into bills, the reserves are very negative. In Private Report you will have our numbers.
With negative reserves, do you depend on the evolution of the flow?
Correct, the flow of the exchange balance will be decisive, I do not believe that the field liquidates all the stock it has in its possession, given the uncertainty of world markets, the man from the field will be very cautious to get rid of the merchandise. On the other hand, Argentina needs gas to function, so when the cold weather arrives it will have to buy the ships with LNG, which today has a gas price equivalent to US$50 per million BTU, a year ago it was worth less than US$10. This greatly complicates the exchange balance, as well as the fiscal result, in Argentina we pay between US$1.50 and US$2.0 per million BTU as a residential consumer.
How are we with farm exports in the first two months of the year?
In the first two months of the year, exports of oilseeds and cereals contributed US$4,942 million, a record figure for all of Argentine history. It is 25% more than what was received in two months of the year 2020, and it is 46% above what was received in the average of the first two months of the years 2016 and 2019. The government of Alberto Fernández has the highest income of dollars from the field of history. Grains and cereals are Peronist.
Is this rise in exports enough?
In our opinion it is not enough, more exports would be needed to be able to finance the purchase of energy and let us remember that this year the World Cup is in Qatar, the balance of tourism will be very deficient, therefore, the exchange balance could be under great stress .
Is the price of grains very high?
Skimming will come soon, there is a big inverse in Chicago prices, the rise will not last forever. We are recommending selling because these prices are exceptional, whoever does not sell will lose a great opportunity, in our opinion, supplies must be sold and bought, which will be a scarce commodity, given that Russia is a major world supplier of these products, which will no longer reach the market. with the fluidity of the past. In Private Reports, the graphs that show the grain price curves in Chicago and Argentina, showing the inverse that heralds the drop, and what they steal from our producers.
The government is thinking of putting withholdings
A serious mistake, these prices will not be sustained and when they go down you will have a serious problem. The government cannot raise withholdings by decree, it will buy a problem with Congress. Before April 15, the government needs to approve the 2022 budget, in order to accommodate the budget to the agreement with the IMF. On the other hand, any announcement of a rise in retentions will make the producer delay the sale and the income of dollars. Betting on a rise in withholdings is shooting yourself in the foot
How many shots in the foot has this government given itself?
Too many, for example, the cattle stock is growing and the government closes meat exports. A ridiculous measure, since it manages to reduce the income of dollars into the country, foreign sales fall, sales to domestic consumption fall and the price of meat on the counter rises. The closure of meat exports was harmful to the government, the refrigerators, the producer and the consumer. You can’t do so many things wrong with a single measure.
Conclution
March is a month in which we could see a rise in the monetary policy interest rate, an increase in the fixed-term rate and a large rise in the active rate, which is what represents the financial costs for Argentine companies.
The government continues with the crazy idea of delaying the exchange rate. The IMF gives tools to the Central Bank to delay it. They are partners in failure. We are seeing another channel, if they persist in that policy, the adjustment will come from the market side, when the Central Bank does not have the dollars to pay for imports, tickets abroad, the payment of credits or interests from private companies. The Central Bank is going to collapse in the foreign exchange balance, which will not be immediate, but which has more chances of occurring in the second half of the year.
Farmers should take the opportunity to set the price of their products and take a position on inputs. This government will continue to intervene in the markets, the IMF is a partner of the government when it comes to increasing taxes or pressuring the producer to sell and that the dollars remain in the hands of the State.
Livestock will continue to be bogged down without growing, fewer exports and little merchandise in the domestic market, which over time will be more expensive. Special livestock report in Private Reports.
The prices of bonds in dollars should adjust upwards, we believe that once the agreement with the IMF is approved they will rise in price. Bonds in pesos that adjust for inflation will continue to rise. Local shares recovering price. The United States Federal Reserve meets on March 16, it could raise the rate and that will affect the price of shares on Wall Street. In Private Reports how to buy bonds as savings and use them to finance the company.
War is an uncontrollable variable, it is best to take the greatest possible forecasts in this scenario.
Industrial companies will suffer from a lack of basic inputs from abroad. This would imply a decrease in the use of installed capacity and an increase in unit costs. If we add higher energy costs to this, inflation would be above the average forecasts of market analysts.
Foreign exchange delay and inflation pushes companies to seek more scale, it is necessary to take advantage of credits at negative rates compared to inflation. Those who do not achieve more scale will lose profitability, and that can lead to large losses. think about it
Source: Ambito
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