Government “celebrated” the data of inflation to the month of December. Compared to the 5.1% monthly of the last month of the year, 2022 closed with an annualized inflation of 94.8%, lower than the 3 digits that were expected, and this was due to the celebration of the ruling party. Despite this, inflation in 2022 was the highest in the last 30 years and shared a podium with countries such as Zimbabwe, Lebanon and Venezuela, for being the economies with the highest annual inflation in the world. Also, although the general level did not exceed three figures, there were items that did. It was the particular case of Restaurants and hotels, reaching an annual inflation of 108.8% and Clothing and footwear, accumulating 120.8% inflation in 12 months. In the latter case, the triple-digit barrier was even broken in August, when specific annual inflation for that sector rose to 109.0%.
Inside of the Plan Hold, the Minister of Economy, Sergio Massa, insists with a monthly inflation of around 3.0%. Its objective is that, during the first quarter of the year, the monthly data begins with 4, to later stabilize at values that begin with 3. In any case, and given how the outlook is shaping up, we believe that it will be very difficult for this to happen.
The Central Bank of the Argentine Republic recently published the Survey of Market Expectations (REM) to December 2022, in which they present the projections of the main variables for the entire year 2023. In said report, the average market analysts state that we will coexist with an annual inflation of around 100.0% throughout the year. On average, monthly inflation for the first half of the year would be 5.8%, almost double what the government’s economic team expects.
Another variable that measures the thermometer of the economy is the dollar. During the year 2022 it was government policy to delay the exchange rate. The annual devaluation rate was 72.4%, practically 30 percentage points below inflation for the period. Although the government followed this monetary policy to try to anchor prices and that inflation does not shoot up even more, like everything in the economy, it was a decision of “short blanket” since it brought negative consequences on the other hand.
A dollar behind encourages imports, since merchandise could be purchased at a lower price than it should be, while, for exactly the same reason, it discourages exports since exporters hope to be able to sell their products to the world at a more reasonable value. This situation meant that, for 3 months, imports exceeded exports, making the Argentine trade trade deficit. This deficit, added to the negative result of the public accounts, caused the Argentine economy to experience twin deficits.
Faced with the disincentive to export, fewer dollars entered the coffers of the Central Bank. The scarce reserves forced the authorities of the BCRA and the government to restrict imports, trying to stop the outflow of foreign currency in this way. If during 2023 the exchange rate delay continues, added to the few agricultural liquidations that are expected as a result of the severe drought, dollars will continue to be scarce, so we do not believe that imports will be released, but rather, on the contrary, they will not We rule out applying greater obstacles.
Looking ahead to 2023, we do not believe that the strategy will change much. During the first half of January, the devaluation rate was 2.3%. If we extrapolate said rate to the entire month, it would give us a monthly devaluation of 5.3%. During the last quarter of the previous year, the average devaluation rate rose to 6.3%, so we would be experiencing a slowdown. If the average monthly inflation of 5.8% proposed by the market analysts in the REM is met, the devaluation would once again be lagging behind.
The average of the analysts who participate in the REM estimates a wholesale dollar at $331.00 by the end of the year, which would mean an annual devaluation of 87.0%, lower than what the same analysts expect for inflation.
Although the official data is not yet known, the economy is expected to have grown by around 5.0% throughout 2022, in part, thanks to the positive statistical carryover from the previous year. Looking to 2023, projections revolve around lower growth rates, around 1.0%, leaving no positive carryover for the following year. There are even those who estimate that the GDP could contract during this year. The world economy is also facing a complex year, driven mainly by the slowdown that countries such as China, the United States or the European Union may experience. Of course, if that happens, it will have a negative impact on emerging and developing economies, such as the case of Argentina.
Taking up with dollars, the alternatives are not far behind. Although, during 2022, they were also behind inflation, in the first days of January the temperature rose. In just 15 days, the MEP rose 7.0%, the CCL 4.3% and the blue 5.6%.
There are those who argue that a rise in the AL30 bond and in the CCL dollar could translate into a future rise in the parallel dollar. This situation could be due to the following.
On the one hand, the AL30 Bond is one of the instruments most chosen by those who want to acquire financial dollars since it is quoted in both pesos and dollars, allowing the operation to be carried out.
The price of alternative dollars, either MEP, so that the currencies remain in the country, or CCL, to send said currencies abroad (which is why the CCL is more expensive), responds directly to the laws of supply and the demand. The higher demand will push its value up. However, it often happens that the government intervenes in these operations, trying to prevent the price from rising even more.
Having said this, it should be clarified that the biggest difference between alternative dollars and the informal dollar is that, as its name indicates, it operates in a parallel and unregulated market, in which the government cannot intervene. Therefore, the price formation of the blue dollar is 100.0% free. However, we could say that “take as reference” to the prices of alternative dollars, especially the CCL, precisely because it is the highest price, and “try to imitate“His movements.
Those whose funds are declared can resort to the alternative dollars while those who do not have them declared must resort to the blue dollar. In a highly informal economy like Argentina’s, the demand for the parallel dollar is high, and that also pushes up its price.
On the other hand, apart from the fact that the AL30 bond is used for these operations, the price of said instrument acts as a thermometer of market expectations. The fact that, for example, the value of an instrument that matures in 2030 is rising, means that the market would be discounting a change of government and looks optimistically at that change.
Looking optimistically at a change of government, when there are still 12 months left for that to happen, generates greater turbulence in the present, directly impacting variables, including the price of dollars, whether alternative or informal.
In addition to bonds and the CCL dollar, there are other instruments and conditions to take into account to predict the movement of the informal dollar.
On the one hand, as we mentioned, the blue dollar operates in an informal market, so anyone can resort to it. The fact of living in a highly regulated economy, with countless restrictions and exchange rate traps, increasingly promotes the purchase of this currency. As impediments continue to be placed, the demand for the blue dollar will continue to increase, and therefore its price as well.
On the other hand, the reference interest rate set by the Central Bank of the Argentine Republic can act as a moderator of the price of the dollar. As the BCRA raises the rate, there could be more incentives to allocate the extra funds to instruments in pesos and not allocate them to the purchase of dollars, so that their demand could cool down a bit and, thus, their price. The point is that although it can serve to encourage financial investments in pesos and thus discourage the purchase of dollars, at the same time, it ends up discouraging productive investments because it is more profitable to place a Fixed Term than to buy a machine to increase production and thus give more employment. Just for these “cons“The thing about the interest rate rise is that the Central Bank regulates it and does not raise it forever. In fact, compared to the latest inflation data for the month of December, the BCRA decided not to change the interest rate, leaving it at the 75.0% annual nominal.
Regarding the future movements of the blue, the last months of the year 2022 its price was ironed around $295. Depending on the place and the volume traded, said average may have been $2 or $3 higher or lower. Later, due to a seasonal issue, in December the blue woke up and its price rose sharply. As of January, and again due to a seasonal issue, we believed that the price could stabilize between $350/$360. However, that did not happen, as it continued to rise. This may be due to the delay that it had during 2022 with respect to inflation.
The parallel dollar grew 69.0% year-on-year. Seen from this perspective, there is still a long way to go. Also, let’s remember that March is usually one of the most intense months of the year, it is generally when we experience spikes in inflation. Having said this, we believe that the currency may find some calm during the month of February, we estimate that it will reheat engines for the month of March.
Degree in Business Administration. Consultant Salvador Di Stefano
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