Vaccine, IMF and Elections: the three axis that “prop up or shoot” the exchange gap
The world helps… politics may complicate it
Vaccines vs. Covid: An uneven and risky race
IMF. Good cop/Bad cop or chicken game?
Elections: what is at stake and how does the market read it?
Since our last monthly report in mid-February, a myriad things have happened and, in turn, the base scenario and the risk we run of moving towards the unstable scenario, which we posed at the time, stay intact.
With great disparities, the world went ahead with vaccination and it seems to be useful in reducing severe cases of Covid-19, providing a light at the end of the tunnel. This dynamic, added to the materialization of fiscal packages in the developed world atop a mountain of debt, is given by an acceleration of the expectations of recovery of the economies and the acceleration of inflation. On the flip side, a steeping of the US bond yield curve with a 10-year rate at around 1.75% put an end to the financial euphoria unleashed in late 2020. For the moment, commodity prices remain decoupled from these corrections, although they slowed the rise. Soybeans remain between 500 and 530 dollars per ton and even with a lower harvest (between 43 and 44 million tons of soybean as a result of the drought) it would add between US$6.000 and US$ 8.000 to exports. Meanwhile, the dollar is once again becoming stronger against the currencies of emerging countries that face an increase in the cost of funding. The dollar in Brazil is around 5,6 reais, with the Central Bank raising the monetary policy rate from 2% to 2.75% (and would do so again at the next meeting).
In these circumstances, the IMF confirmed the issuance of SDRs for an amount of 650 trillion dollars, somewhat higher than what we had commented on in our last report. For its quota, Argentina has US$4.370 BB that will enter the Central Bank’s coffers sometime between August and September.
At the local level, the attempt to coordinate a drop in nominality by announcing a brake on the crawling peg worked to collapse devaluation expectations (from 70% to 30%), and lower inflation expectations somewhat (from 50% to 45%). In January, the dollar and prices were going up at a monthly pace of 4%, while the Badlar interest rate remained around 2.8%. With the announced drop in the rate of increase of the dollar, 3% in February, 2.4% in March and 1.5% as of April? Inflation remains at 4% per month and the interest rate remains at 2.8% monthly. With an inflation of 16% accumulated in the first four months, the projection of 29% included in the budget looks like an impossible feat. For the moment, the emphasis works to keep the wage bargaining process at around 30% (review in the second quarter included) and simultaneously holds the official discourse that in the electoral year “wages have to beat inflation”.
The new dollar-interest rate equilibrium coordinated a record settlement of exports in March and the Central Bank bought US$1.5 BB stepping a little less on imports. The exchange gap remained at around 60% (dollar MEP at $140, blue chip swap dollar at $150, official dollar at $92) with a decreasing level of intervention by the BCRA. In March, the Central Bank hardly intervened by selling bonds against pesos and it only used US$150 MM to purchase bonds against dollars, 10% of the purchases in March and 17% of the almost US$900 MM that it used since it began to intervene last November. The increase in demand for pesos to pay the wealth tax, a settlement of the overhang of pesos since October (a result of the acceleration of inflation and the rebound of the economy and less dependence on the Central Bank to finance the fiscal gap) contributed to this exchange truce in the most complicated months. In April, May, June, and until July, the seasonality of the harvest itself would help hold the demand for pesos, risks appear later on. In August a great concentration of maturities of pesos ($4.12 BB), the lower seasonality in the supply of agriculture products, the end of of the payment of the wealth tax and (if, as everything seems to show, the calendar does not change), the result of the primaries on August 4 with a campaign that will continued until October 24). Three factors will define the 202 scenario and the kick off for 2022:
1) The race between vaccination and Covid-19 and the magnitude of the second wave of infections that has already started and which scares when seeing what is taking place in Brazil, but in an economy with no fiscal leeway to finance the new lockdown.
2) The dynamics of the Central Bank reserves in the face of the need to maintain the stability of the exchange rate gap when after the golden quarter, the harvest is finished and it is necessary to continue facing the debt maturities of international agencies, if the agreement with the IMF is delayed – as the government threatens.
3) The result itself of the October 24 election, its previous season on August 4 when the primaries are held and the market reading regarding the result of the midterm election. Paradoxically, an adverse result could decompress the financial side, but today, with a united Peronism and a disorganized opposition, the chances of this happening are low unless the health system and the financial side collapse (vertices 1 and 2).
The three vertices of the triangle operate with each other affecting the stability of the figure, which to some extent, is given by the level of the exchange gap. Paradoxically, the government has been playing with fire in the first two vertices, with delays in the vaccination and playing a “chicken game” with the IMF, judicializing the credit granted to the Macri administration and demanding conditions of terms and interest rate that are outside the statute of the agency. All this takes place while the Minister of Economy maintains a double speech that is not clear that it is colliding and/or is part of a “good cop, bad cop” negotiation strategy. Progress is also being made with electoral measures that go against the grain of what would be structural reforms that underpin systemic competitiveness beyond the destruction of wages caused by the devaluation of the peso: The reduction of the income tax on individuals and increases in that on companies (which must also finance the return of the advances of their employees) while the provinces raise gross income taxes, the prohibition of dismissals that is still in force and the brand-new mobility payment used to adjust pensions, which “helps” fiscally the first year and becomes a boomerang later on. All these measures go against the structural reforms that an Extended Fund Facilities agreement requires. Just like the exchange gap, which continues at levels of 60% and triggers perverse incentives for the functioning of the economy.
The objective is set in the midterm election for which it requires: to keep the coalition united (Peronism should not break) and that the exchange gap does not skyrocket. If vaccination does not accelerate and the government does not find a mechanism to decompress maturities with the IMF for September and December and decides to use the SDRs (which should be used to shore up reserves against a very deteriorated Central Bank balance sheet), the chances that the gap will once again take a toll pushing us to the unstable scenario, are going up drastically. Above all, between August 4 and October 24, when – if the electoral calendar is maintained – the campaign is still intact and the result of the first round is known. If no agreement is reached before August 4, there will hardly be anything before October 24. We will see the first test on May 30 when the $2.4 BB of the Paris Club matures, the refinancing of which the Minister tries to negotiate on his tour in Europe that is already starting. Meanwhile, the game still is “We’ll see after October… “
