Javier Milei’s dollarization is becoming more and more distant, why?

Just six business days before the transfer of command, Javier Milei He gave his economic team a head start this Wednesday by confirming Luis Caputo as head of the Treasury Palace. However, it remains to be seen who will be the president of the central bank and, in the midst of all this transition, no one talks about the dollarization, the great campaign flag of the president-elect.

Without many definitions in economic matters, the resounding fall of the alternative dollars reflects that Milei He is launching (who knows when) his flag proposal: the dollarization of the Argentine economy. The collapse of the Cash with Settlement (CCL), the MEP and the blue, as well as the contracts of future dollarexpose the low probability of dollarization, at least in the medium term.

What happened to the plan to replace the peso with the dollar?

About, Martin Kalosdirector of the consulting firm EPyCA, maintains in dialogue with Ambit that, currently, the possibility of dollarization seems to have been ruled out, although “It was always considered an unfeasible idea, in addition to being a bad proposal”.

However, the proposal remains part of Milei’s speech although in recent weeks, this idea has lost relevance and only mentioned when asked about it“but its implementation seems to have been postponed” and that decision “will not be taken soon”, but will be left for the distant future, Kalos maintains.

The proposed flag of the next head of state fell from its structure when Emilio Ocampothe architect of this proposal, refused to take charge of the Central Bank (BCRA), something that was read in the market as “zero chance of dollarization” at least in the medium term.

Dollarization: the signs that dilute Milei’s proposal

The shortage of foreign currency, the lack of reserves of the Central Bankthe excess supply of pesos and a country risk that is around 2,000 points complicate the viability of a dollarization in the short term, maintains a report by the consulting firm Ecolatina.

“It is proposed that for dollarize, A much higher market exchange rate than the current one would be needed, which would motivate demand to anticipate to buy dollars at a lower value,” he adds.

Ecolatina emphasizes that future dollar contracts they would not be reflecting the expectation of dollarizationbut rather, “they are very far” from a consistent value to execute that proposal.

Another factor is that in the middle of a rally in sovereign debt bonds and stocks (including that of banks, who are more exposed to the risks of dollarization), although securities that adjust for inflation (CER) showed a worse relative performance, there was a strong trend towards exchange hedging via instruments duals and tied to the official exchange rate (dollar Linked)“reflecting confidence that these titles will be paid, in line with Javier Milei’s statements,” adds Ecolatina, who noted that “yesand the commitments will be strictly fulfilled”.

Likewise, Econviews maintains that, “dollarization is not going to happen”. In line with what Kalos from EPyCA raises in the first lines of this note. However, from that consultancy They do take for granted “an exchange shock that could take the dollar close to 800 pesos”. There Milei will be able to announce the exchange rate unification, although some restrictions would remain, as occurred with Macri in 2015.

This means that there would be a lower volume CCL with a gap of around 20% or less. That is a real exchange rate compatible with a “overshooting”, but then inflation will adjust things to a real exchange rate that is approximately 30% more expensive than it is currently, this City consulting firm projects.

“That would allow the BCRA to recover reserves. If the transition is more complexperhaps the unification will be higher than $800,” warns the consultant.

Thus, the market observes a more moderate Milei and an orderly transition “although they foresee unknowns that could possibly alter the markets.” However, The consensus is closed that dollarization, at least for now, will not happen.