Fiscal, financial, and monetary program with capital controls
Argentine history seeks to escape the noise coming from abroad, with the Dollar Index at 110, exchange rate pressure in Brazil pushing the dollar above R$6, and a 10-year yield back at 4.8%. The placement of the repo and the drop in country risk below 600 bps signaled progress toward reopening the economy to the credit market, a necessary condition for the program to move forward.
Let’s remember that throughout 2024 and up until the January 2025 payment, Argentina’s Central Bank (BCRA) purchased USD21.8 billion, and the Treasury bought USD15.8 billion from the BCRA. However, only USD2.6 billion remains in deposits. The rest was used to meet maturities (USD4 billion in principal, including those of January 2025; the remainder went towards interest). In other words, the issuance of pesos for the purchase of dollars remained in the economy, while the dollars were used to finance the Treasury’s financial program. This explains why net reserves (discounting government deposits and Bopreal maturities over the next 12 months) have returned to a negative USD9.4 billion, just USD2.2 billion higher than the starting levels. Alongside the issuance of pesos for the partial unwinding of remunerated liabilities and the debt rollover of only 88% since September, the monetary base has increased from 10 trillion to 31 trillion, a 12% rise in real terms.
Until May, the dollars purchased by the BCRA came from the current account surplus (the “blend” was financed by deferred payment of imports and the recession). Since October, with the economic recovery, exchange rate lag, and the continuation of the blend, the dollars purchased by the BCRA have been coming from the private sector’s capital account. The cash based current account has been in deficit since June, and the accrued surplus is trending toward a deficit heading into 2025. This comes in a context where the real multilateral exchange rate has returned to pre-adjustment levels and continues to lag inflation. If the blend is sustained, the projected deficit of 0.6% of GDP for 2025 in the accrued current account would increase to 2.5% of GDP on a cash basis.
Failing to take advantage of the carry trade and the tax amnesty to accumulate reserves, excessively appreciating the real exchange rate to bring down inflation and the exchange gap while simultaneously expanding credit—without building an alternative anchor beyond fiscal consolidation—is regrettable. However, it is also true that the answer to the question of what political sustainability would have looked like if the disinflation process and the narrowing of the exchange gap had been slower is not straightforward.
The way the broad monetary base target was set (including the Treasury’s deposits at the BCRA, which prior to the “swap” of repos for Lecaps were of the BCRA), the setting of the Lecaps and monetary policy rates based on a crawl that has just been confirmed to decrease from 2% to 1% per month, and the resulting decline in inflation expectations allowed for credit expansion. It is precisely this credit expansion, alongside a fiscal policy that is no longer contractionary and private sector (formal and informal) incomes starting to outpace inflation (and especially the dollar), what contributes to the economic rebound. This occurs in a context where the downward signaling of nominal variables and greater openness of the economy discipline prices.
However, if the Treasury secures dollars borrowed from the IMF to recapitalize the BCRA, it could immediately spark additional euphoria in the prices of local financial assets and sovereign debt, extending the carry trade horizon. This is the market’s bet, though two opposing rhetorical questions arise: 1) Is an agreement with the IMF feasible under an increasingly rigid exchange rate framework with fresh funds that increases the IMF exposure to the country? 2) Would the government be willing to ease exchange controls and allow the currency to float during an election year, given the current global volatility, without certainty that floating would only lead to appreciation? The issue is that a large amount of carry (from locals) tied to short-term debt under strict controls carries a latent risk of money printing and a negative feedback loop if exchange rate flexibility works in reverse and bond demand falls. This demand is currently sustained by the downward management of nominal variables within the controls. The lender of last resort should this happen is once again the BCRA, and it does not look that the IMF would be willing to allow its dollars to be used again if market sentiment shifts.
If the goal is to build an anchor that allows for a framework with fewer capital controls, recapitalizing the BCRA’s balance sheet is a necessary condition, but not by indebting an already heavily indebted Treasury. The ideal scenario would involve the BCRA purchasing dollars with a fiscal surplus, while the Treasury begins to extend the maturities of peso-denominated debt and starts refinancing dollar-denominated debt. None of this is happening. The Treasury doesn’t even have a surplus to cover the accrual of interest on peso debt, which, it’s worth noting, is not included in the fiscal statistics.
The current liquidity mechanisms to continue expanding credit have a limited horizon moving forward. The Treasury has fewer pesos left at the BCRA, private banks’ holdings of LEFIs are shrinking, and the BCRA is bargaining over repos. What is clear is that the Economic Program has been pragmatic whenever the contradiction between the narrative and reality has forced it into a corner. Within the context of strict capital controls and a compressed country risk premium, the chances of finding a way to kick the can down the road remain. As such, we maintain our two scenarios unchanged, with capital controls persisting in 2025. The key questions revolve around how the story unfolds after the October election and what lies ahead for 2026.
