Six points to monitor
We finished our previous report by outiling six points to monitor: three economic ones associated with stabilization and three social/ political ones associated with governance and the ability to suport systemic productivity and lasting fiscal consolidation, a necessary condition for stabilization to work.
The three economic ones: 1) How the path of inflation reduction continues, 2) If the Central Bank’s purchase of dollars is sustained as the installment payment of new imports begins to normalize, and what is its impact on net reserves and the exchange rate gap, and 3) What the fiscal numbers show month by month and their impact on the monetary program.
The three social/political ones: 4) How the distributive conflict (wage negotiations/strikes) evolves in the face of income erosion coordinated by the inflationary spike, 5) What is society’s reaction to the recession and the erosion of incomes and savings, and 6) How the treatment of the DNU (Decree of Necessity and Urgency) and the Omnibus law progresses, following the return to square one.
Specifically, we emphasized that behind the “controlled shock” program, there was room to start telling a story to the market. The main uncertainty was focused on the evolution of social/political factors, while it was expected: a reduction in inflation after the initial jump, the continuity of the BCRA’s purchase of dollars, although in smaller amounts as new imports began to be paid with the 30/60/90/120-day schedule, and that fiscal numbers (at least until May) showed a surplus.
A month later, the economic program is working, even better than expected.
1) Inflation is moderating a bit faster, but it remains absurdly high and inconsistent with the crawling peg at 2% monthly (25.5% in December, 20.6% in January, and around 16% in the first data for February), while the exchange rate gap remains controlled halfway between the 10% floor of early January and the 55% of a month ago, while still sending 20% of exports to the CCL. The impact of utility rate increases that began in February is still pending, although with a slower schedule than visualized a month ago. It is still unclear the change in the subsidy scheme (from subsidizing supply to subsidizing demand) and its impact on price statistics.
2) The Central Bank continues to buy dollars, albeit at a slower pace, and this week it begins to pay 50% of imports. In the first month since the program started, it accumulated purchases of USD 4.299 billion, while in the second month it did so for USD 2.987 billion. Net reserves went from being negative at USD 12 billion to also being negative at USD 6 billion, not counting the issuance of Bopreal to structure commercial debt. Despite the issuance of pesos for the purchase of dollars, for the interest rate on remunerated liabilities, and for the dismantling of Ledivs, the monetary program is highly contractionary. The contraction through Bopreal, through the repurchase of Treasury debt from the Central Bank prior to the placement of debt to banks (which simultaneously buy an exit option -PUT-), and through the dilution via inflation is reflected in a monetary base and Remunerated Liabilities that have fallen 34% and 12% in real terms since the program began, reaching USD 12 billion and USD 35 billion respectively at the official exchange rate.
3) The financial deficit in 2023 ended closer to 4.5% of GDP than the initially reported 6% of GDP, after the correction of the calculation in the interest account of the Treasury’s debt repurchase with the surplus of pesos obtained in the December auction. If we take into account the halving of floating debt in the last month of last year, the inertial deficit looks closer to 4.2% of GDP, 1 percentage point below the starting point presented in the program. Despite the concentration of interest, January showed a financial surplus of $518 billion with expenses that grew 40% below inflation and revenues that did so in line. Faced with inflation of 254%, capital expenditures fell 50% in nominal terms, transfers to provinces stagnated, economic subsidies rose 27%, while social benefits and transfers to universities increased by 144%. The blender worked at full capacity in January.
The program is inflationary and recessionary. The expectation is that the decline in economic activity, via a collapse in imports, will continue to improve the Central Bank’s balance sheet. The decrease in consumption would help compress the dollar prices of goods, supporting the change in relative prices without completely eroding the population’s income. The million-dollar question is how quickly inflation decelerates, how deep the recession is, and to what extent daily micro-devaluations and interest rates can converge to a single-digit inflation rate, without resorting to a new exchange rate jump that would accelerate the dynamics again when simultaneously transitioning from the 80%-20% anchor. At some point, the currency peg must shift to a monetary program that is not only based on fiscal adjustment through a massive spending cut that is unsustainable and a financial program that only recirculates pesos to the Treasury within the exchange control by selling Puts to banks. All this “assuming” that the social/political issues (4, 5, and 6) are managed with fewer frictions than those that appear on the surface, given the counteroffensive that escalated after the setback in Congress and extended over the weekend to the President’s X and his army of followers.
