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Sunday, August 14, 2022

Dollar alert: inheritance complicates the minister

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The National Treasury, with data as of June 2022, has a fiscal deficit of 4.8% of GDP, while the stock of debt in $ and monetary liabilities of the Central Bank add up to 37.1% of GDP.

To the extent that the Treasury deficit increases, it must be financed with debt or monetary issue, this generates a negative externality of credit restrictions to the private sector or higher inflation that does not allow the country’s growth.

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The only thing that was mentioned about this problem is that the deficit pattern agreed with the IMF will be complied with, this implies that Serge Massa undertakes to lower the deficit from 4.8% to 4.0% in the remainder of the year. On the other hand, we are going to go for a voluntary debt swap in $ and work will be done to limit the growth of monetary liabilities.

In the Central Bank, the monetary liabilities are the combination of the monetary base (sum of the amount of money that we have in circulation plus the reserves of the banks) plus the debts between the Central Bank and the banks.

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The monetary base adds up to $4.3 trillion and the debts $6.8 trillion. The monthly interest paid on the debts adds up to $0.26 billion per month. Total monetary liabilities add up to $11.2 trillion.

The great challenge is to know how much monetary liabilities would amount to in December. If we take into account that the interest rate is on the rise, the current monetary liabilities plus the interest that is added monthly to the liabilities could be around $12.7 billion by the end of the year. If we add to that the issuance to finance the Treasury, the sum could reach $14.0 billion. Watch out.

The balance of dollars is very complicated, in the coming months there will be no significant income of dollars from exports, since in the second half of the year sales decline because most of it is exported in the first part of the year. The dollar balance deficit in the first part of the year was 0.7% of GDP and the stock of reserves totals 6.9% of GDP.

Argentina has a very low level of reserves, the government intends to increase reserves by 1.3% of GDP, either by requesting new financing or through the early settlement of exports. It is difficult for this increase to occur because the early liquidation of exports will have to finance the flow of necessary imports that the country has, therefore, there is no full impact on reserves. As you can see, everything has little taste.

Resources could be obtained from financial operations called repo, which are loans against bond guarantees, a maximum of 1% of GDP could be obtained.

With a lot of luck, reserves could go from representing 6.9% of GDP to 8.0% of GDP, this compared to a stock of pesos that today is at 37.1% of GDP and rising, does not change Rather, history tells us that Argentina must continue with the stocks for a long time, since, if we free the pesos, and they go against the dollar, the exchange rate would jump to unsuspected levels at this juncture.

Conclusions

. – The fiscal deficit is very high and the only solution is to lower it to levels of 0% to achieve a sign of structural change, something difficult to do at this juncture and even less so if there are no structural changes in sight.

. – The government, through the Central Bank, limits imports to 5% of what is imported in 2021 or 70% of what is imported in 2020, whichever is less, this implies that there will be no growth if prices cannot be increased. basic inputs that come from abroad. With little growth in 2022 and 2023, it will be difficult to tame the flows of pesos and dollars that are now negative and difficult to reverse.

. – There is no vocation to lend money to Argentina because it does not have an economic plan. There is a set of measures that were made explicit at the inauguration of the new minister, but the plan is under development (we want to believe that). There is no clear diagnosis of how to work in the future in the generation of dollars, there was no talk of an export opening for sectors that today have demand abroad such as meat, but they seek to seduce soybeans that today do not have a good international price. This implies a lack of knowledge of the markets in which the country interacts with its products abroad.

. – The markets look at the flows and then put a price on financial assets. With the economic announcements made, Argentina will continue to issue pesos or take on debt to finance the fiscal deficit. On the other hand, there is no way to have a positive dollar balance at this juncture. To alleviate both problems, new debt will be used and the existing one will be refinanced. What was not made explicit is what measures will be taken to repay the existing debt plus the new debt to be obtained in the market.

. – As long as the market remains uncertain as to how the debt is repaid and the budget balance is not achieved, financial assets will remain at depressed levels, which is why we believe that stocks and bonds will not be a successful alternative until an economic plan is made explicit. The dollar at less than $300 was a great gesture of the market, now a new stage begins, if there are no concrete results, the bow to a dollar of $400 at the end of the year is a reality. Yesterday the reserves ended at US$ 37,818 million, little for the epic that the government seeks to achieve.

Source: Ambito

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