Is this time any different?
In October, the planets aligned. The BCRA (Central Bank of Argentina) returned to buying dollars (it has accumulated USD 761 million so far this month), and the country risk returned to May’s levels, rapidly approaching 1,000 basis points after having nearly touched 1,700 basis points two months ago. In this context, the convergence of the financial dollar to the official dollar is accelerating—we went from a 50% gap in August to 20%. With the validation of longer Lecap interest rates around 3.9% monthly in the latest tender, fixed-term deposit rates between 3% and 3.5%, a 2% crawl, and a declining financial dollar, the carry trade remains favorable, especially if we believe the 2025 budget, which includes a drop in inflation to 1.4% monthly with a crawl starting at 2% monthly and ending at 1%. Let’s remember that a year ago, before the election, the blue-chip swap dollar reached ARS 1,200, equivalent to ARS 3,100 at today’s prices.
It’s precisely the dollars from the tax amnesty that have started to circulate again in the economy via bank credit in dollars (+USD 1 billion) and private sector bond issuance (USD 1.48 billion paying rates from 4.97% to 9.5%). Suddenly, the four key factors that the market watches, which had become uncoordinated in May/June when the BCRA stopped buying dollars due to maintaining the blend, have now aligned:
- The BCRA resumed buying dollars, although gross reserves remain at USD 28 billion and net reserves are still negative at USD 6 billion. Additionally, there are USD 9 billion in deposits at bank branches awaiting decisions from those who declared them in the tax amnesty.
- The BCRA resumed buying dollars, although gross reserves remain at USD 28 billion and net reserves are still negative at USD 6 billion. Additionally, there are USD 9 billion in deposits at bank branches awaiting decisions from those who declared them in the tax amnesty.
- Inflation dropped to 3.5% in September, and in October our RPM (Monthly Price Variation Index) points to 3%.
- Milei’s poll numbers stabilized after his decline in September. The halt to the rejection of the veto on the education financing law demonstrates the ability to avoid gridlock from a disoriented opposition.
This is all happening in a world where the search for yields has reappeared following the Fed’s initial rate cuts, with record fund inflows into emerging markets in the last week, and where the Argentine story behind Milei is regaining prominence in the region.
The question of how long the carry will last now has proponents who argue that this is the beginning of a long process. They repeat the government’s narrative that the peso will be scarce, and Argentines will continue to pull dollars out from under their mattresses to finance direct and indirect consumption (via domestic credit funded by dollar credit driven by the tax amnesty, to compensate for incomes that are not recovering, mainly in the public sector and informal sector). “Endogenous dollarization.”
In this scenario, the financial dollar converges with the official one, and when that happens, the blend disappears de facto (it doesn’t make sense for the private sector to settle 20% of exports at the financial dollar rate). Hypothetically, this would accelerate the Central Bank’s (BCRA) dollar purchases, easing the foreign exchange constraint. Without the blend (whether de facto or de jure), the ability to intervene in the blue-chip swap dollar, helped by the drop in country risk, would allow the carry trade to be extended. This, of course, assumes that the demand for pesos holds, or in other words, that the demand for peso-denominated debt is sustained through interest rate “steroids” and interventions to manage the exchange rate gap if necessary.
The assumptions behind this are that society continues to tolerate the adjustment, that the coordinated currency lag isn’t a problem since Argentina has six or seven sectors that can coexist with the dollar resulting from this scheme, and that the debt owed to parent companies for profits and/or unpaid imports (which only amounts to USD 6-7 billion) can continue to wait. Ultimately, the goal is to arrive at the mid-term elections competitively, with the economy in a favorable position, and to prove that “populism” won’t return. The accumulation of peso-denominated debt maturing in dollar terms, as a result of the carry trade, extends the capital controls scenario. Even with a favorable political outlook in 2025, an exit strategy isn’t intuitive.
The new development is that, with this financial story, the dependence on Trump and the IMF to support the election year has diminished. If the country risk keeps falling, the government may attempt a voluntary swap of short-term dollar bonds with a positive NPV, utilizing the recent amendment to the financial administration law via decree, which would ease the government’s dollar needs and avoid the Repo. If this happens, without the blend and with greater net financing from the private sector, the BCRA’s level of reserves will directly depend on the intervention needed to manage the exchange rate gap in a context of greater currency lag. Of course, this situation is self-reinforcing.
For now, we can rule out the scenario of IMF-driven adjustments in January and maintain two dynamics: one where the feedback is positive, country risk falls, and the intervention required to manage the gap is limited, allowing the BCRA to accumulate reserves; and another where the need for intervention in the gap escalates, and the feedback turns negative. Today, flows are moving in the first direction. It requires global conditions to remain favorable, and most importantly, for society to continue tolerating the adjustment as we approach an election that, as always in a polarized Argentina with no basic agreements, results in binary outcomes.
