Inflation and the dollar: the risks that the city sees in the official strategy of prioritizing the reduction of prices and postponing the end of the currency controls

Next Monday the Government will implement the reduction of the PAIS Tax from 17.5% to 7.5%which will serve, as announced, to decompress prices. Thus, it seems that The official strategy would be to prioritize lowering prices and postpone the end of the restrictions.something that generates a strong “uncertainty” to the market, which The bank is keeping a close eye on negative net reserves and warns that the situation could get worse if the exit from exchange controls is postponed further.

“The new import scheme predicts that the dynamics in the official market will become unfavorable for the accumulation of reservesalthough only from October. Likewise, Reducing the PAÍS tax could put further pressure on reserves and deteriorate fiscal accounts. It is evident that The government’s priority is to deflate rather than quickly get rid of exchange controls”say the stockbroker PPI.

From FMyA, for its part, they warn that There is a lot of “uncertainty” regarding what will happen with the cepo. They claim that Net reserves could worsen to negative US$8 billion by the end of 2024 and that in 2025 the situation could be worse. For the market, the voice is unanimous: the lifting of the restrictions will not be in 2024.

“We think that would be the most desirable scenariosince we think that the cost of getting out of the currency controls in terms of inflation and activity today is lower than what is imagined,” warns FMyA.

The phrase is repeated over and over again.as in the latest report circulating in the city of 1.816where they also highlight “The Government has decided once again that the priority is to slow down inflation as quickly as possible” which, according to some high-frequency private measurements and as acknowledged on Wednesday by the Minister of Economy, Luis Caputo, the figure of August will be close to that of July (4%)“even at the cost of a drop in reserves during September due to increased demand from importers in the spot market.”

Dollar: the risks of postponing the end of the currency controls

We can summarize that the economic plan The Government remains focused on sustaining the fiscal surplus, the “crawling peg” of 2% and in manage to break through the 4% CPI in September. Besides, The national administration hopes that the recession has bottomed out and that activity will recover by the end of the year. Despite this, Salaries and pensions are still far from matching the inflation accumulated since the beginning of the Milei era.

“Despite the notable improvement it had in the first five months of the year, the weakness of the program is the external front given that The exchange rate appreciated again and the combination of a blended dollar with an increase in import payments and no capital inflows puts pressure on net international reserves which returned to negative territory, a trend that would worsen in the coming months,” they highlight from Cohen.

To maintain the strategy, according to this analysis, The government needs financing, and to achieve this, they claim they need to liberalize the foreign exchange market. “Not doing so would bring more costs in the medium term, which would increase uncertainty and would hit local assets“, they explain.

“The Government is thus debating whether to continue prioritizing the battle against inflation or the liberalization of the exchange market, which will undoubtedly have short-term effects, but which It would give greater sustainability to economic policy, which would enjoy the benefits of deregulation and fiscal balance.“, they expand from Cohen.

In turn, the economist Roberto Cachanosky also came out from their networks to warn about this situation: “First they said (from the Government) that they had to accumulate reserves in the BCRA to get out of the cepo. Then, (they did it) when they cleaned up the balance sheet of the BCRA. Now, when they close the problems of the stocks of the Central Bank. Then, the day that the expanded monetary base coincides with the traditional one and inflation converges to zero. And now, They changed the date of convergence of the expanded monetary base with the traditional one. They extended it one more year. They fell in love with the currency controls“.