Crossed Scenarios
The consensus as the months pass
The pending agenda
2016: change in relative prices facing development through investment in 2017
Vulture Funds. Griesa says no, yes…but
In recent months, and as a result of the FX pax achieved thanks to the “water canteens” which allowed crossing the summer desert by stabilizing Reserves at the end of the year and lowering the interest rate for foreign currency debt to the area of 8%, market consensus corrected sharply downwards their devaluation expectations. Thus, consensus forecasts of economists that arise from Latin Focus, which last September stated an official dollar rate of almost $10 by December 2014 and of $12.6 by end of 2015, were seen as long compared to 2014 which closed with a dollar of $8.55 and a forecast on average of $10.60 by end 2015. This flight without self-criticism generated a crash on devaluation expectations implicit in dollar futures causing heavy losses to those who sought coverage and a significant gain for this item for the BCRA, which partially reversed the losses suffered in January and in parallel generated significant decompression on the exchange rate gap to around 40%, far from the 80% reached last September. Somehow, the consensus now internalized our scenario of exchange rate anchor as a “strategy” of politics. Especially after the obvious costs in terms of rising inflation and recession that were left after the attempt to gain competitiveness by moving the dollar rate faster in early 2014. What went wrong in such forecasts was the fact of minimizing the capacity of the “FX restrictions” in preventing the market from forcing a sharp devaluation, a situation which the BCRA made clear by completely closing the availability for import payments in August and was reflected in a deepening of the fall in consumption, particularly in regard to durable goods.
While there is consensus that the government will not validate an abrupt adjustment of the dollar, and consequently there has been a sharp downward correction in inflation expectations for 2015 (from 35% in September to 30% today, with an inflation that at the margin on an annualized basis is closer to 23% depending on the index considered), the scenarios remain divided regarding the ability of the economy to grow in 2015. In other words, there will not be during the current year an adjustment via prices and doubts are set into the possibility of seeing a further adjustment via quantities, although at the margin the forecasts are moving away from the sharp declines forecasted some time ago and more towards a scenario of stagnation. Again, unlike the consensus, we have been stating since late last year a scenario with growth in 2015 (of 1.5%). This scenario was initially associated with a slow but favorable resolution of the trial in New York, and to the extent that markets began to show a strong recovery in prices of local bonds and the consequent fall in the cost of funding, we began to mutate towards a scenario without agreement but with access, although limited, to additional foreign currency. Thus, the availability of dollars is expected to allow the Government again to finance itself in 2015 without having to compromise on the fight against vulture funds, and incidentally “seize” the compulsive financing provided by Judge Griesa when he blocked the bond payments in dollars and euros (Discount, Par and Global), which are still deposited in the Central Bank and at end of year are estimated to total US$2.8 billion. Clearly, the ability to generate growth in 2015 is subject to the amount of financial dollars for the Central Bank or the Treasury, which are needed to finance a higher level of imports. So far the majority comes from China (US$3.3 billion of the US$6 billion that would be available from the swap signed last September), although at the margin the bond issues of YPF and of the City of Buenos Aires for US$500 million each also helped.
But the analysis of the year varies and will depend primarily on how expectations are managed regarding the change of agenda in 2016. That is, on how much coverage the BCRA is willing to deliver to transit the remaining months. Paradoxically, the message of one of the candidates on their ability to end “FX restrictions” on their first day of management with no costs and just with confidence empowered the Central Bank to provide coverage until March 2016 by selling dollar futures at $11.5. If this strategy is generalized, the effectiveness of the exchange rate anchor to moderate inflation and boost activity could last until the end of the term. Paradoxically, the expectation of a change of agenda in 2016 is giving leverage to the current management (now also with futures) and is helping to improve the climate of the economy. In this sense, the next six months will surely be the best, with a “controlled” inflation at around an annualized 23% and economic activity rebounding as early as April as the new wages come into force and the new crop is settled, and a last quarter that will depend on how willing the BCRA is in prolonging this strategy by providing coverage. Our scenario still forecasts a dollar at $9.9 by November 30, inflation in the region of 25% and an economy that grows on average 1.5% driven by consumption, while investment and net exports have the contrary effect.
Mounted on this dynamic, 2016 appears as a pivotal year, where the economy will hardly show the strong growth and moderating inflation forecasted by the market despite the change in expectations announced in advance. On one side, the improved forecasts are anticipated in time and reflect the plunge in bond yields that, with ups and downs, deepened in recent months, and will allow leverage for the economy in 2015 (via Central Bank while the Treasury debt continues to diminish). These yields are still paying double than neighboring countries which have a significantly greater deterioration in their external accounts. On the other hand, the need –over a longer horizon- to start correcting some of the accumulated distortions (high inflation in the region of 20/30% -amidst statistical distortion and accelerating distributive struggle-, overvalued exchange rate and delayed utility tariffs, “FX restrictions” and exchange rate gap, and external and fiscal deficits estimated at 5.6% and 2.4% of GDP for end 2015), can hardly be compensated at the start of 2016 with a jump in investment generated only by “trust”. Today, the starting point of low interest rates in the world and reduced debt of the Treasury in the market allow postponing decisions resorting to credit, but as has been already demonstrated in the past, in the end, financial volatility at some point shuts down this route. Combining Keynes and Friedman we state that in the long run, there is no such thing as free lunch.
