Javier Milei’s government program has three nominal anchors. 1- The most important is the fiscal one, given that the program implies non-issuance to finance the treasury and the cleaning up of the BCRA’s balance sheet. 2- Popular supportgiven that the government has a minority in both chambers and needs the support of the population to be able to promote reforms. 3- The nominal exchange rate anchor or dollarizationand this is where the coin competition comes into play.
There are several conditions to eliminate the stocks and reach the coin competition: fiscal surplus, sharp drop in inflation, bringing the rate of monetary liabilities to zero, normalization of import debt, normalization of the payment of dividends owed, having a sustainable debt profile, recomposition of reserves and the law bases to provide certainty regarding the government’s ability to carry out structural reforms.
This last issue is not essential to lift the stocks, but it would contribute a lot to growth. The other issues were fulfilled or are on the way to being fulfilled.
Step by Step
In these months, pesos have been absorbed from the market through fiscal surplus, treasury debt and BOPREALES. As a result of this absorption, inflation and the exchange rate gap were reduced, at the same time that the BCRA sharply lowered the rate it pays for its remunerated liabilities.
The government will continue with this strategy of monetary absorption and lower rates until it is 0%. Once monetary liabilities have stopped being remunerated, The market will be the one that determines the interest rate in pesos, and we will be without realizing it in a currency competition regime.
Argentines have around 85% of their monetary holdings in dollars, so the currency choice has already been made. The difference is that under a coin competition, The use of the dollar in everyday transactions is enabled. Not only cars and rents could be pegged in dollars, but also construction supplies, professional services, and even daily consumption products and salaries. Slowly, the dollar will gain preponderance over total daily transactions.
The Argentine economy is totally demonetized; The pesos in circulation, taking monetary base plus monetary liabilities, are around 6% of GDP. A very low number, so the pesos would be insufficient in the face of an economic recovery that would force families and companies to begin using dollars stored inside and outside the system. Monetary liabilities are at the lowest level since 2014 and the monetary base at historic lows.
Dollarization
At the same time, That 6% of GDP are the dollars that would be missing to complete a total dollarization of the economy, which is President Milei’s final objective. If funds from the IMF arrive, whether in the form of a loan or a flexible line for crisis prevention, This process would be accelerated The same if the basic law is approved, but the final result is the same. Everything is possible with a fiscal surplus, which at the same time caused a phenomenal rearrangement of the country’s capital account and led to a solid trade and current account surplus. The fiscal deficit was reduced from 6% of GDP to zero, and the quasifical deficit from around 10% of GDP to 2%.
Many, concerned about the rise in dollar prices, propose the impoverishing formula of devaluations and protectionism. When the only way to improve the Argentine cost is with greater productivity: stable currency, credit, deregulation of the economy, lower taxes, improvements in our infrastructure and improving the educational system. It is also the way for the phenomenal growth in exports that we will have from the countryside, Vaca Muerta and mining to translate into solid improvements in the microeconomy. Exports, credit and investment could be the basis of recovery.
Many indicators suggest that the economy it could have hit bottom in April. I think we will have a recovery in the form of Nike pipette: abrupt fall, due to factors inherited from the previous government, with a slow recovery at the beginning, but on solid bases.
Financial Consultant
Source: Ambito
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