One of the most listened to consulting firms warns about the future of the debt in pesos if the exchange rate restriction is lifted

The government is committed to revitalizing an economy that is in deep recession, while striving to bridging the gap between the official dollar and the blue dollar with the aim of lifting the exchange rate restrictions. It happens that most of the consulting firms in the city project an official dollar above $1,200 by the end of the year and a prompt dismantling of the exchange restrictions.

In this context, Econviewsone of the most influential consulting firms in the country, shared its expectations in this regard in its latest report. The analysis addresses the post-cepo financial program, the maturity profile of the next months and the factors “the additional factors for thinking that the restriction can be lifted.”

The consulting firm of Miguel Kiguel He also maintains that the latter Lecaps issued were for 306 days. “This is positive because if these issuance periods are maintained, there will not be many maturities in the coming months, which will help” to keep public accounts in good health and eventually lift the restrictions.

The post-cepo financial program

“The post-cepo financial program is not so worrying,” he analyzes Econviews. He argues that there are opinions that see the debt in pesos as an obstacle to getting out of the currency trap. Because the current capital controls act not only as a barrier to the exit (and entry) of foreign currency. “They have also acted as a cage for pesos, given that those who want to convert their holdings of local currency face restrictions that prevent them from doing so. This also helps to fund the state at a convenient rate.“, he says.

So, lift controls on the exchange market”This could cause many of those pesos to stop being invested in local debt and become demand for dollars.“. Logically, that would be a problem. “However, we are of the opinion that the restriction should be lifted anyway and that the benefit of doing so outweighs the risk,” the consultancy recommends.

Debt maturity profiles: “the outlook looks relatively friendly to lifting the restrictions”

First, let’s look at the maturity profile for the coming months. In the immediate future, the busiest month is September, where AR$ 14.1 billion mature.Since we see little chance that the cepo will be lifted so quickly, it should not be a problem for the Treasury to renew all this.“.

Also, most of what expires are Lecapswhere banks have part of their liquidity in pesos. October (AR$ 5.1 billion), November (AR$ 6.2 billion) and December (AR$ 7.7 billion) are much less burdensome. January (AR$ 16.8 billion) seems to be a complicated month, but it is not. Of the total that matures, the majority corresponds to the dual bond TDE25, of which 45% is in the hands of the Central Bank (according to the latest annual report). Therefore, once September is over, “the outlook looks relatively friendly to lifting the restrictions.”

The other factors that allow the lifting of the cepo

Econviews He argues that there are several additional factors that suggest that the currency controls can be lifted. The first is that the real interest rate must be higher. With a very negative rate in pesos, it is true that debt renewals may become complicated, but if the premium improves, this problem may disappear.

Taking the inflation-adjusted monthly effective monetary policy rate, “we see that in the last period without a currency control, it was on average 0.51 positive points. This becomes clearer after the agreement with the IMF in 2018. On the contrary, the same calculation for the period from September 2019 to the present gives an average real rate of 0.71 negative points.”

As we have been saying, and projected in our base scenario, lifting the restrictions should imply having higher rates.This may increase the debt stock, but if capitalizable or zero-coupon instruments continue to be issued, it will not add complications on the interest payment side.“.

Added to this is the fact that in the last tenders the government has been extending the terms of the new debt. The last Lecaps issued were for 306 days. This is positive because if these issuance periods are maintained, there will not be many maturities in the coming months, which will help.

There is another point to consider, which is the real exchange rate at which restrictions are lifted. This approach is similar to that of the interest rate. Today’s official dollar (AR$ 945 pesos) seems cheap. Thus, Econviews suggests that, although there are risks associated with lifting the exchange rate restrictions, the long-term benefits could outweigh those challenges. The profile of debt maturities in the coming months, together with a possible improvement in real interest rates, offers a relatively favorable outlook for dismantling exchange rate restrictions.

While there will be challenges, such as the potential conversion of pesos into demand for dollars, the consultancy argues that the benefits of eliminating the currency controls, along with careful management of monetary and exchange rate policy, could outweigh the difficulties and contribute to Argentina’s economic recovery.