Transition and afterwards
The attempt to quantify the transition from an increasingly extreme financial repression scheme to one of greater economic freedom in a future administration, given the Central Bank’s (BCRA) balance sheet disarray, is becoming more and more complicated after the resulting three-way scenario.
With no anchors in sight, the compression in the exchange rate gap after the jump in the official exchange rate to $350 (negotiated as a counterpart to the disbursement from the IMF following the gross non-compliance of the program) lasted just 48 hours before overreacting to levels close to the peaks of 130% seen in October 2020 and January 2022. Meanwhile, the exchange rate improvement in terms of competitiveness achieved fades away with inflation in just a month and a half (11.5% August and the first projection for September is 10.5%, including the various freezes announced in both public services and food, according to our Price Survey). As we have been stating, devaluing all at once without a program would only lead to an escalation in nominality.
The gross attempt to anchor the exchange rate and utility rates before the October 22 election, and eventually (if Massa manages to make it to the runoff) maintain it until November 19, may fall short and backfire if pressure on financial dollars persists. Hence, the desperate search to intervene in this price, whether by selling exchange rate insurance to importers (Lediv), using the dollars purchased in the MULC to intervene in the Mep/blue-chip swap dollar (CCL) exchange rate and offset the drop in dollar deposits and announcing a new soybean dollar (not yet implemented) that allows 25% of its export dollars to remain unliquidated and supply the CCL, simultaneously improving the producer’s peso price. All extremely short-term measures that attempt to sweep all the flaws under the rug and increase the exit costs.
As we have been stating, a stabilization program is a necessary condition to begin straightening out the Central Bank’s balance sheet, correct the distortion of relative prices, narrow the exchange rate gap and establish a credible anchor to break the inertia and reduce inflation. Additionally, fiscal consolidation is crucial, aiming to eliminate the printing of pesos to finance the government, allowing for the reestablishment of a dollar interest rate in the economy that enables the rollover of dollar-denominated debt maturing from 2025 onwards. Given the starting conditions, the room for gradualism, as there was in 2015, is not present today. A shock is required to correct the initial distortion of relative prices and establish a credible anchor to progress on the aforementioned issues.
Therefore, the question is not whether what is coming is a shock or gradualism. The correct question is whether it is a “controlled shock” or an “uncontrolled shock” that escalates nominal values permanently. This can happen either because it was assumed that the exchange rate would have a limit that it didn’t (as in the financial reform of Cavallo in 1982) or because it was assumed that the distributive struggle would not escalate as a result (Rodrigazo in 1985).
This is why stabilization, as a necessary condition, requires two additional simultaneous conditions to complete the vertices of a triangle. On the one hand, structural reforms are needed to restore Argentina’s systemic competitiveness while making fiscal consolidation sustainable over time and tolerable changes in relative prices, without triggering a violent increase in unemployment and/or a more severe collapse in purchasing power. On the other hand, governability must be considered in three dimensions: 1) to prevent an escalation in social conflict due to changes in relative prices and fiscal adjustment, hence the need to think about compensatory mechanisms that can serve as a means to modify expenditure indexation; 2) to allow the necessary laws for stabilization and reforms to pass through Congress; 3) to begin extending Argentina’s horizon, making lasting changes, and putting an end to the grotesque pendulum in which the country is currently stuck.
Returning to the points made earlier, one could say that Massa has strength in Governability (which clearly erodes after the results of the primary elections) but he currently lacks a stabilization or reform program, relying solely on tactics to reach the other side with a scheme where “anything goes.” Bullrich has a team (currently borrowed from the Fundación Mediterránea) with a focus on stabilization and reforms, although there are doubts about governance in its three dimensions. Milei, for now, assumes governability, proposes miraculous dollarization as an immediate proxy for stabilization, and has a flexible plan of first, second, and third-generation reforms that evolve depending on the audience and, above all, tend to dissipate or be postponed as his electoral chances increase.
It is clear that the campaign message is not the government program. However, in such a fragile Argentina, these two often become intertwined. We prefer not to envision scenarios of uncontrolled shock, although this does not mean that things cannot go wrong during the regime change. Maintaining the status quo is not an option either. Going forward, we present two simulations of a “controlled shock” with different intensities (devaluation without dismantling the exchange rate controls beforehand), without breaching contracts and without an escalation in distributive conflicts.
