Ceteris paribus current conditions in the official exchange market and the bias of fiscal policy, breach of target of reserves and primary deficit is practically guaranteed. Given that this is the last pre-election evaluation, it is to be expected that the government will do everything in its power to avoid a significant deviation that results in an exemption (waiver). Although it would be the first of the program, it would be far from the last, since there is no doubt that the economy will adapt to political needs in order to increase electoral chances.
In this sense, there could also be a waiver in September, when the goals of the second quarter (pre-STEP period) are evaluated. To top it off, the primary elections could seal the fate of the ruling party, so it will be a time to reassess the convenience of following or not the guidelines of the IMF program. An election favorable to the opposition would end up tipping the balance towards an economic policy that does not strictly abide by the guidelines of the EFF. The reason behind this logic is that the revision of the goals for the third quarter is scheduled for December and those for the fourth only for March 2024, so they would be a problem for the incoming administration.
Returning to what is incumbent on us in the very short term, in terms of the reserve goal for the first quarter of 2023, the Central Bank has to increase its holding of net reserves by US$5.5 billion from December 2021. In other words, the stock should exceed US$7.8 billion for March 31.
At the moment, the firepower of the BCRA was reduced to US$4.8 billion from US$7,780 million at the end of 2022, a figure that required meager purchases to reach the IMF target. What happened?
After the end of the dollar “soybean” 2.0, the net purchases of the monetary authority in the official exchange market (MULC) returned to negative territory.
The liquidation of agriculture -the main offer of the MULC- sank to a minimum due to two factors:
- he collapse in wheat production because of the drought,
- the early soybean settlement in December that ran the summer offer of the oilseed to the last month of 2022.
Additionally, on the side of private demand, the Central would have irrigated dollars to importerson the margin, to mitigate the recessive effects caused by the harsh exchange restrictions -activity contracted 8.3% annualized in the last four months of 2022-.
Thus, the stock of reserves of US$4.8 billion almost US$3 billion should be raised to meet the goal. However, if the rate of sales persists at US$43 million per day and current exchange conditions remain unchanged, it could drop to US$3.7 billion by the end of March. Consequently, the deviation from the Fund’s objective would be extended to US$4.100 million, which would undoubtedly lead to a request for forgiveness from the organization.
And if that was not enough, the primary result of January, more than paving the way to meet the IMF guidelines for the first quarter of 2023, made it significantly more difficult. In a typically surplus month like January, the fiscal deficit was $203,938 million or 0.12% of GDP, exhibiting the worst performance under this methodology, implemented in 2016. The strong expansion of public spending pushed it to its highest level since 2017 .
Thus, spending in January would have reflected the payment of expenses accrued (called floating debt) in December, which is usually the month with the highest deficit of the year, with the aim of reaching the fiscal target of 2.5% in 2022. In this way , the primary result for January represents 46% of the goal for the first quarter ($441.5 billion), leaving a $237,562 million margin for the February/March two-month period to comply with the guidelines.
The situation becomes more discouraging if one considers that February and March tend to be months in which the fiscal result worsens notably compared to January. Given the unusual nature of the first month of 2023, this trend cannot be extrapolated for the rest of the year. For now, what can be said is that compliance with the fiscal goal was complicated much sooner than expected. In turn, it should not be ruled out that the fiscal laxity of January is a trailer of the bias of the fiscal policy that the government would carry out in the middle of an electoral year.
How could a significant non-compliance with the fiscal and reserve target be avoided, resulting in waivers?
All roads lead to a 3.0 “soybean” dollar in March. Given the delay in the soybean harvest due to late planting, the scheme would focus mainly on capturing part of the 6/7 million tons collected from the last harvest (carry) and, to a lesser extent, to encourage the liquidation of the little that has been harvested at this time. Therefore, the differential exchange rate offered should be attractive enough to tempt soybeans to liquidate the surplus production left behind by the first two editions of the program.
At current international prices, would imply a liquidation of between US$3.400 and US$4.000 million if all is sold carry. If the BCRA were to buy all of this potential liquidation, the target reserves could be reached at the cost of greater obstacles to imports and a deepening of the economic contraction.
Therefore, contrary to what happened with its predecessors, a new “soybean” dollar does not guarantee the fulfillment of the first quarter reserve target. However, would reduce the margin of deviation from the goal, avoiding a waiver. Likewise, it would help to reach the fiscal target, since it would derive in an extra collection of withholdings for early settlement at a higher exchange rate.
For more than a renewed soybean dollar can buy time for the ruling party, it was more than clear with the two previous editions that it is a temporary patch that does not fix background imbalances. In short, the tension between adjusting economic policy to the IMF guidelines and, in turn, to electoral needs will be present throughout 2023.
The incentives to do the former will diminish as the electoral contest approaches, making it difficult to meet the agreed goals. It will not be surprising that various gadgets are used to achieve what is established in the EFF, as already happened in 2022. A 3.0 “soybean” dollar could be the first to inaugurate this list.
PPI Analyst.
Source: Ambito
David William is a talented author who has made a name for himself in the world of writing. He is a professional author who writes on a wide range of topics, from general interest to opinion news. David is currently working as a writer at 24 hours worlds where he brings his unique perspective and in-depth research to his articles, making them both informative and engaging.
