Public Opinion, Flows and Fundamentals
What began as a pragmatic controlled shock program to try to capitalize on the balance of a bankrupt Central Bank (BCRA) without breaking contracts, with a primary fiscal surplus of 2% of GDP and a high exchange rate that allowed the BCRA to buy dollars (via a collapse in imports) and reduce part of the excess pesos (via inflation and a negative interest rate) while advancing on a monetary program (which would allow to start building an anchor other than the exchange rate in order to dismantle the capital controls), stumbled.
Partly due to the way it was calibrated initially, where a carry trade insurance was established via a blend scheme that automatically allocated 20% of exports to the blue-chip swap dollar (USD 9 billion by May) while accumulating new commercial debt estimated at USD 11 billion due to the payment in installments of imports, leaving the stock at levels similar to those before the Bopreales, while only retaining half of the USD 17.6 billion it bought in reserves. Even with the reactivation of the Chinese swap and the IMF disbursement, gross reserves went from USD 21 billion to almost USD 30 billion, and net reserves went from being negative by USD 11.4 billion to being negative by USD 2.5 billion.
Partly due to the decision to maintain the crawling peg at 2% monthly for longer than recommended, reducing the overshooting of the real exchange rate by half in just six months (today’s $903 contrasts with the almost $1,700 of mid-December at today’s prices) and just 19% above the starting levels compared to an initial dollar jump of 120%. But what was initially debatable became malpractice when the haste to dismantle the Cental Bank’s debt accelerated the reduction in the interest rate (repos at 3.3% monthly), incentivizing migration to LECAPs (4.2% monthly), changing quasi-fiscal cost for fiscal cost, lowering the remuneration of fixed-term deposits to 2.8% monthly and creating an arbitrage between the repo rate and the LECAPs rate that disrupts the monetary policy rate set in the new scheme by LECAPs auctions compared to the one in the secondary market.
The jump in the exchange rate gap since late May seems to have ended the dismantling of remunerated liabilities in exchange for Treasury debt. On the one hand, in the last auctions, it only accepted an amount similar to market maturities. On the other hand, the Minister announced that the negative interest rate phase was over (the LECAP rate at 4.25% coincides with May’s inflation at 4.2%), so they should raise it in the face of the inflation spike expected in June considering the public utiity agenda was resumed (our survey points to 5.6% in June). Will they do it to try to moderate emerging exchange pressures and incentivize export liquidation while announcing that the crawling peg at 2% and the Blend are strictly settlement, refuting the IMF? Will they only react with the LECAP or also with the Repos to ensure the transfer to Fixed-Term Deposits?
Since the program started, the BCRA’s remunerated liabilities fell from $54 trillion at today’s prices to $18 trillion, while the Treasury’s debt in market hands rose from $36 trillion to $63 trillion at today’s prices. The former fell by $34 trillion, the latter rose by $27 trillion, the setttlement was only 8%, and the rest was “shifted” to the Treasury and the BCRA, which increased dollar debt by $5.5 trillion (Bopreales-Lediv). As a safeguard, the Treasury keeps zero-interest deposits in the BCRA for $12.9 trillion, generating negative carry. The celebration over the fall at today’s prices in the endogenous creation of pesos from $6 trillion per month to less than $1 trillion contrasts with the increase in Treasury debt that generates the issuance of discount instruments and without coupons.
Of the $63 trillion in debt held by the market, $52 trillion is on the banks’ balance sheets, which in turn have $26 trillion in Puts (the right to sell the bonds to the BCRA). Of the latter, only 6% have been exercised in the last 30 days; the rest can be executed at any time. Unlike the initial debt placements of the current administration, which attempted to extend maturities (with indexation and Puts), the new LECAPs were issued in the short term, without Puts, and with an exception in the regulations that limits public sector risk on banks’ balance sheets, increasing Treasury debt from 20% of assets to 35%
The flip side was a change in the structure of peso-denominated debt; today, almost 30% is at a fixed rate, but adding up all that matures (including Bopreales and Agencies), there are maturities of USD 39 billion for the remainder of the year and another USD 39 billion next year. The maturities are calculated using the official dollar, maintaining the 2% monthly crawling peg, and the IMF’s inflation scenario: 139% in 2024 and 45% in 2025 (consistent with a deceleration to 4.2% monthly in 2024 and 3.2% monthly in 2025). With this scenario, the real exchange rate, which is currently 19% above the starting levels, would be 13% below the starting levels by the end of 2025.
The million-dollar question is how to lift the currency controls and make the peso compete with the dollar with an exchange rate that continues to lag, negative interest rates on fixed-term deposits, an increase in Treasury risk on banks’ balance sheets, and a resurgence of LECAPs funds to manage working capital with this concentration of maturities. All this with a country risk of 1,450 bps. At what rate and terms can Argentina finance itself without currency controls? What primary surplus balances the financial aspect, considering that the average coupon is only 3.8% today? What are the chances of a new IMF program without prior adjustments? For now, the Minister has bought time by announcing that the currency controls will only be lifted when the conditions are right, without committing to a date.
The deterioration of fundamentals coexists with public opinion that supports and flows that halted the trajectory well before ensuring a decisive response to questions about the financial program in the face of the concentration of maturities. Answering the title of the last monthly report; it wasn’t chess, like in the game of the goose, we depend on chance (and/or dollars that have yet to appear) as we start to move back spaces.
