Dollar, debt and reserves: the impact of the global shock on the Government’s plans

He global markets shake up this Monday opened new fronts of concern for the Argentine economy. fragile local situation Several factors had already been added to what was beginning to blow like a “External headwind” for the plans of a Government that, without reservation, seeks to convince the skeptical market that it can sustain the current exchange rate scheme and face the large external debt maturities of 2025. The moderation of the initial impact of Japan’s collapse brought some relief to the offices of the economic team, where they put the consequences into perspective.

The fall of sovereign bonds and the The rise in country risk is added to the devaluation of the real against the dollar and the weakness of commodity prices, two problems that had already been raising alarm bells The key to gauging the magnitude of the local impact will be to see how far the international financial shock extends. But the market already considers that the external front poses more difficulties for the roadmap that Luis Caputo sells towards an exchange rate unification that does not imply a devaluation jump.

At the time of writing, the panic numbers in the market had calmed down considerably, although they were still negative. The Argentine risk indicator prepared by the bank JP Morgan, which at the beginning of the session exceeded 1,700 basis points, reduced its increases during the day and, at the close of writing, rose 27 units to 1,639. Financial dollars were trading with increases of up to 1.5%, despite the moderation of the initial depreciation of the real and the continuation of the foreign exchange intervention. Meanwhile, In the official offices themselves they pointed out that the validity of the restriction would help cushion the impactSoybeans rebounded slightly in Chicago, but remained at a very low level (US$383 per tonne).

The initial trigger was the collapse of Asian stock markets (with daily falls exceeding 13%) in the face of the rate hike applied by the Bank of Japan, which cut short a multi-million dollar “carry trade” process on a global scale, leveraged on cheap Japanese credit. Amid concerns about a possible recessionary scenario in the United States, European markets and Wall Street also replicated significant falls, which in the case of the Nasdaq technology index were around 3%. The initial panic in the United States tended to moderate by midday.

Global headwinds and doubts about Luis Caputo’s plan

As Ámbito pointed out, various reports were already circulating in the City’s offices at the end of last week about the “global headwind”, which was adding problems to the Government’s plans. Quantumthe consulting firm of Daniel Marx, He pointed out that “some changes in “International conditions do not favor Argentina.” He also mentioned the increase in interest rate spreads on emerging countries’ bonds, the appreciation of the dollar against other currencies and a 10% drop in the country’s terms of trade.

For its part, Econviews, by Miguel Kiguellisted: the fall of Wall Street and emerging currencies, soybeans around US$380 and devaluation in Brazil, in a context of relative local exchange rate lag and difficulty in accumulating reserves. “In general, external shocks are followed by exchange rate correction, but today that is a bad word because all eyes are focused on lowering inflation. The issue is that, although the headwind is not the fault of the economic team, reality is what it is. In Chile, when copper goes down, the peso goes down. Pretending that nothing is happening outside leaves you more vulnerable”stated an Econviews report.

In that sense, Claudio Caprarulodirector of the consulting firm Analyticaput the spotlight on the additional difficulties that the external front poses to the economic team in convincing the market that it is viable to maintain the current exchange rate scheme“The government is facing a very adverse global context. The drop in commodity prices is compounded by greater pressure on the exchange rate,” he said, also highlighting the weakness of the real, which, although it has softened the initial drop on Monday, has suffered a strong depreciation in recent months.

Personal Investment Portfolio (PPI) He also warned about the impact on Luis Caputo’s strategy: “The depreciation of the real, which had begun prior to the events in the US last week due to changes in Brazil’s economic policy, is putting pressure on the Argentine peso to depreciate. However, given that the pace of devaluation of the official exchange rate remains at 2% per month, the peso is artificially appreciated against what the flows in the region would indicate. Therefore, The weakening of the real means that the devaluation required to get out of the currency controls must be greater. The strong deterioration of Argentina’s terms of tradewhich is largely explained by the international price of soybeans at real lows in 18 years, It also goes in this direction”.

How many problems will this Monday’s shock add? “I have the feeling that It is a temporary shock that will be corrected over the course of days. and it has to do with the Bank of Japan’s rate hike two weeks ago, the appreciation of the yen and the subsequent dismantling of carry portfolios. I don’t see anything ‘broken’ in the market and in fact this correction is healthy. Obviously, volatility from outside always affects us. But I assume that it is something temporary and that at most it can last until September when the FED finally begins to lower its rate,” he told Ámbito. Ramiro Tosidirector of the consulting firm Suramericana Visión and former Undersecretary of Financing.

Meanwhile, the financial analyst Christian Buteler He stated that, If the country risk continues to rise, it will feed back into the problems in meeting maturities of debt for almost US$20 billion next year. “The Government’s plan A was to return to the international credit markets to pay next year’s due dates. To do so, they had projected having a country risk of around 600/700 basis points, that the American rate would be in the order of 3% (at the beginning of the year there was talk of up to five Fed rate cuts this year) and, thus, with a local rate of 9% or 10% to be able to roll over all the debt in 2025 and beyond,” he said in an interview with this media outlet.

He added: “That did not happen and the second option that the Government is now appealing to is to do a repo. But doing a repo under these conditions, with the markets falling and doing a ‘fly to quality’, with your sovereign debt at 40 cents or 50 cents per dollar, is really complicated. It is still a long way off and will depend on how this shock continues to evolve: if it is a one-off that is resolved in a few weeks or if it continues and a period of global risk aversion opens, which would complicate plan B.”

The truth is that any external headwind, which exceeds the decisions of a government, is mounted on the weaknesses of the Argentine economy and on a Roadmap proposed by Luis Caputo that does not convince the market. The main weakness is the red of net reserves from the Central Bank (which are negative between US$4,000 million and US$6,000 million, depending on the methodology used) and the lack of favorable prospects for the accumulation of foreign currency in the face of the end of the coarse grain harvest and the intervention to contain the gap with the dollars purchased in May.