Trump, RIGI, tax amnesty to offset the drop in reserves
Seven months after the program began: 1) the dollar has fallen behind again and is only 15% above the initial levels after a 120% jump. 2) the Central Bank (BCRA) stopped buying dollars and out of the USD 17.3 billion it purchased, only USD 6 billion remain in gross reserves; net reserves remain negative at USD 3.6 billion (IMF methodology). 3) the anxiety to eliminate the BCRA’s remunerated liabilities resulted in an almost equivalent increase in the Treasury’s peso debt, with a concentration of peso maturities that for the rest of the year amounts to 5% of GDP, ten times the remaining primary surplus included in the government’s targets.
Despite the enormous fiscal effort tolerated by society, implicit in a reduction of public spending over the annual base semester by almost 6 percentage points of GDP (from 19.8% of GDP to 14%), the progress of public securities slowed considerably before showing that Argentina had access to credit to refinance dollar maturities. The country risk, which had been falling from the initial 2,600 pbs to a low of 1,200 pbs in mid-May, now stands at around 1,553 pbs.
From the beginning, the economic program prioritized managing the peso overhang over accumulating dollars for the BCRA. With 20% of exports going to the CCL and the normalization of import payments once the effect on the “BCRA’s working capital” dissipated, it was evident that the BCRA would not buy dollars in the second half of the year. However, the impact was anticipated to June when, despite a trade balance surplus of almost USD 2 billion, the BCRA sold USD 47 million. The shortage persisted in July (with the BCRA selling another USD 75.3 million so far this month) and will deepen in the coming months as a consequence of the newly announced scheme to pay imports in two installments instead of four.
The dependence on currency controls remains almost intact, and the pressure on the exchange rate gap reappeared, jeopardizing the disinflation based on a 2% crawling peg, the lower calibration of tariff adjustments, and the deregulation of some prices that had been freed, while it is celebrated that wages (formal private sector) are outpacing inflation.
With this new import payment scheme, if the Blend is sustained, the 2% crawling peg, and the announced intervention to withdraw the issuance of pesos from dollar purchases since the end of April (USD 1.9 billion, of which USD 250 million is said to have been used), the BCRA would sell up to USD 4 billion in the remainder of the year. With pending payments of USD 5.5 billion (including the January coupons for local and global bonds), net international reserves could return to being USD 12 billion negative by the end of January.
In response to this, the reaction is to advance a repo agreement with banks to demonstrate payment capacity and halt the rise in country risk (assuming the BCRA can secure the assets to collateralize it), aiming to build a bridge until August/September when dollars would enter the blue-chip swap dollar to pay the anticipated Personal Assets tax and the amnesty fee: USD 2-4 billion to the blue-chip swap dollar, USD 4-6 billion to deposits? The longer-term outlook focuses on unlocking RIGI investments, which would also be settled in the blue-chip swap dollar but with more uncertain amounts and timelines. Fundamentally, it hinges on the “lifeline” that a Trump victory could provide, pushing for a new agreement with the IMF that brings in fresh funds. The magic number is always USD 15 billion, but without much basis. It’s worth noting that even if Trump wins on November 6, the U.S. government transition occurs on January 20. Also, considering the IMF’s bureaucratic timelines and the fact that the reached agreement must pass through the Argentine Congress. Moreover, it seems unreasonable to expect disbursements to lift the currency controls given the current exchange rate lag and the debt maturity profile. A new program would require recalibrating the economic framework (dollar, crawling peg, interest rate), scrutinizing debt sustainability without currency controls, and an agenda of structural reforms.
But the most difficult aspect to explain is the double message regarding the handling of the peso overhang. While the minister and the president align themselves by announcing a “freeze” on the broad monetary base, the BCRA clarifies in its monetary policy statement that what it is setting is the level of the Broad Monetary Base (BMB) as of April 30 at $47.7 trillion, starting from a level of $21 trillion ($32 trillion if LeFi is considered part of the BMB). Meanwhile, the interest rate is still managed by the BCRA, the Treasury is currently paying 3.3% monthly for LeFi and 4.5% monthly for the long-term Lecap.
With the taps closed for financing the fiscal deficit, for issuing pesos to pay the interest on remunerated liabilities, and for purchasing dollars (we’ll see later how the BCRA pays for the bopreales), the remaining three taps are those associated with the financial system’s liquidity: 1) LeFi, which technically operates like REPOs but with Treasury instruments, 2) active REPOs with Treasury Bonds (the interest rate was reduced from 60% to 48% annually), and 3) open market operations, which become relevant if there’s another run against the bond market. Ultimately, whether we see virtuous remonetization (credit expansion) or inflationary remonetization (deposit outflows) will depend on the genuine demand for Treasury bonds, starting from a Treasury risk within the financial system’s balance sheet equivalent to 45% of assets.
Looking ahead, the minister insists that the 2% crawling peg and the blend are strictly maintained and that with a fiscal surplus, there is no fiscal dominance. In this view, inflation converges to a crawling peg that would go to zero. When this happens, they assert, the scarce peso will float against the dollar, and the interest rate will be determined by the market. The main assumption behind this is that with inflation converging to zero and the visualization of the IMF agreement: bond prices rise, the government’s financial program is cleared, and the Treasury’s crowding into private sector credit is financed with external credit. It works in Excel with currency controls, but in real life, the question that arises is, once again, do they make it by procrastinating until October 2025?
