The government is watching another movie. Pressured by the perception of impatience in the financial market, Luis Caputo and Santiago Bausili They came out to announce something that had nothing to do with what the market expected, and they bought themselves an additional risk factor, the instability of the financial system.
This was reflected in the immediate reaction, with falling sovereign bond prices – and the consequent increase in country risk -, sharp falls in Argentine stock prices – particularly those of banks – and a significant rise in the exchange rate gap.
The market had been observing that the BCRA’s International Reserves have been virtually stagnant since April, that June was the first month with net sales, and that the exchange rate is appreciating rapidly. The expectation was that the conference would announce some change in the exchange rate administration that would allow the country to accumulate reserves again.
Contrary to this, the Government announced the maintenance of the 2% monthly “crawling peg”, the 80/20 export blend and reiterated that there is no set deadline for lifting the numerous regulations that affect the official exchange rate and the financial ones. Worse still, the measure announced was the transfer of the debt from the BCRA to the Treasury (something that it had already been doing) to close the endogenous issuance tap that implies the payment of interest on that debt. In fact, the measure reinforces the need for fiscal adjustment or indebtedness, since it could not be paid with issuance, increasing the perception of risk on public debt and deepening the economic contraction.
It is true that the tangle of regulations that currently exist for operating both in the official exchange market and in the financial markets hinder the normal functioning of the economy and, as far as possible, it is advisable to begin to relax them. An orderly exit would encourage the entry of external capital and would contribute to reducing the country risk, a necessary condition to undertake a process of refinancing the public debt in dollars, whose maturities next year reach 17 billion dollars.
Today, the conditions for lifting the existing set of controls are not met, since the potential demand for dollars is too high for the scarce reserves of the BCRA.which would generate an excessive devaluation, worsening the already critical social situation. For some time now, the government has insisted that it would obtain a line of financing through the IMF and with guarantees from the World Bank, in order to have a backing in foreign currency that would allow the elimination of exchange restrictions in a more relaxed manner. We must be blunt and rule out this possibility outright. First of all, The probability of accessing a line of credit of these characteristics is almost zero, but Argentina cannot be a country addicted to taking on debt in order to solve its short-term tensions, irremediably conditioning its future. There is a high risk that IMF funds will only serve to finance capital flight, as was the case in 2018. In May of that year, Argentina took out the largest loan in the history of the IMF (44 billion dollars) to “restore confidence” in the midst of a rise in capital flight. Far from stopping the flight, the loan with the IMF accelerated it: between May 2023 and December 2024, the net formation of external assets exceeded 45 billion dollars. The only thing left from that loan is the obligation to pay, the consequences of which we suffer today and will continue to condition us for at least a decade.
To avoid exponential growth in the outflow of foreign currency, the lifting of controls must be done in stages.. The orderly exit from the cepo depends essentially on three variables: i) robust international reserves, ii) relatively low stock of pesos, iii) competitive exchange rate. The short-term focus must therefore be on improving these three factors. Factors i) and iii) are closely linked. Inflation has already diluted 85% of the competitiveness generated by the December devaluation, generating expectations of a new devaluation jump and discouraging exports.
So, Abandoning the 2% monthly exchange rate depreciation rate is a necessary condition to avoid further exchange rate appreciation.which would deepen the shortage of foreign currency and the pressure on financial dollars. Also, The blend exchange rate that allows 20% of exports to be settled at the CCL must be abandonedbecause it implies a very relevant opportunity cost in the accumulation of Reserves. 20% of the accumulated exports between December and May oscillate around 7.4 billion dollars. The increase in the exchange rate would encourage the liquidation of exports from the agricultural sector. According to the records of Foreign Sales Declarations, we estimate that there are at least 13 billion dollars in soybeans and their by-products from the current campaign that still remain to be exported. The inflow of these dollars, within the framework of a more competitive exchange rate, should be enough to reduce the exchange gap.
The exchange rate increase should be accompanied by a policy of price and wage coordination, to cushion the inflationary and recessionary impact. In recent months, the adjustment fell mainly on the low-income stratum, which brought poverty to a level close to 55%. Fiscal policy needs to be reviewed so that, without compromising the balance of the primary result, the largest contribution falls on the highest-income sectors. To do this, they should increase taxes on wealth (contrary to what the Government did) and review tax expenditures (income tax on judges, exemptions in the Tierra del Fuego promotion regime and especially the exemption of Personal Property on Rural Real Estate, which has a fiscal cost of 0.5% of GDP).
Once the International Reserves reach a reasonable value (around 45 billion dollars of Gross Reserves) and restrictions on operating in the dollar markets have been relaxed financial the purchase of dollars for productive purposes must be enabled. The first step in this direction is to normalize the payment of imports. The current import regime was effective in accumulating reserves in the first months of the year, but it generates distortions in the production chain and has an inflationary impact, especially if the exchange rate gap increases (we estimate that about a quarter of imports are being made with access to financial dollars).
In addition, it has aggravated the problem of private commercial debt, even discounting the effect of the Bopreal. Secondly, the remittance of profits and dividends must be allowed, otherwise Foreign Direct Investment, a source of foreign currency that should increase in the near future, will be discouraged. Thirdly, the purchase of dollars must be allowed so that companies can pay their debts (first commercial, then financial).
The purchase of dollars for hoarding (with limits) would be relegated to a final stage, since it is not a priority use and is the source of demand that is most difficult to contain. In the years when there were no restrictions, the average annual formation of external assets exceeded 19 billion dollars, the equivalent of almost two thirds of the current gross reserves. As long as the purchase of dollars for hoarding is not permitted, it is expected that parallel exchange rates will continue to exist, but this is the price to pay for the scarcity of foreign currency and the bimonetary nature of our economy.
The accumulation of reserves, the existence of a competitive and stable exchange rate, orderly fiscal and monetary fronts and the existence of positive interest rates in real terms should reduce the exchange rate gap and its disadvantages (expectations of devaluation, under-invoicing of exports and over-invoicing of imports, and inflationary pressures, among others).
However, The bimonetary nature of our economy is the result of decades of macroeconomic imbalances, aggravated during periods of financial appreciation that deregulated the capital and financial accounts and inevitably led to balance of payments crises. Limits on the purchase of foreign currency, as well as macroprudential measures that regulate capital flows, are necessary measures to achieve basic macroeconomic balances, boost economic development and restore the basic functions of our currency, in particular that of a store of value.
Facing a normalization process requires beginning to give signs of disarming the strong exchange restrictions that currently exist, but doing so by taking on more debt or in an abrupt manner will only lead us to a new crisis.of uncertain outcome, given the current state of the social situation in Argentina.
* Economist, former director of the BCRA, director of EcoPol Analytica
** Economist UBA-CONICET, @pgaite5
Source: Ambito
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