Dollar, rates, wages and inflation
The electoral year kick-off
After blinking to the right, the turn to the left
2021 Zigzag Scenario
Primaries
A comment on the Market’s Expectation Survey (REM)
Wages should beat inflation
One look in the Region’s Mirror
The IMF´s sharp shift after the Vice President’s letter warning of the risk of bimonetarism while the exchange gap reached 130% last October was put on hold. Once calm was reached and the exchange gap went back to the 70% area (blue-chip swap dollar at $153), the priority is once focused on the upcoming elections. Meanwhile, the IMF’s recapitalization expectations after the meeting of the G7 ministers of economy, which would leave Argentina US$3.3 BB in SDR’s when it becomes effective, and the visualization of a jump in agricultural exports boosted by prices and now rainfalls.
There seems to be no economic logic behind it, the logic is political. The question is whether, as in the past, the political logic is functional to elections or it becomes a boomerang that winds up affecting the outcome as a result of the recreated inconsistencies. The electoral scheme (with or without primaries, and/or with changes in the calendar that postpone the election) and the political organization of the officialism and the opposition that might end up validating it is not harmless in this trajectory.
So far, we handle two scenarios for 2021.
One based on a stabilization plan and an agreement with the IMF that made it possible to rebuild bonds prices and narrow the exchange gap within a consistent fiscal, monetary, and exchange program. Such scheme made it possible to underpin the rebound of the economy and a jump in the inflation rate that might allow diluting the overhang of pesos and rebuild part of the lag in prices during the pandemic. This is the scenario to which they seemed to have turned last October when the jump in the exchange gap scared them. The other is an “unstable” scenario, in which the attempt to maximize the short-term, postponing the agreement with the IMF and/or moving forward to one that only refinances maturities, maintaining a deficit at around the budgeted 4.5%, with the monetary inconsistency of the financing scheme, and trying to use the dollar and public service rates as a sort of anchor in order to attempt to improve real wages resulted in a jump in the exchange gap and a new change in the inflationary regime.
The first scenario needs crossing out. Clearly, the government prioritizes the next election. But it also knows that if it makes a mistake in the attempt to maximize the short term, the financial instability risk will present itself. Thus, the zigzag in the decisions made by the coalition of the government whose priority is to preserve such coalition and reach elections together. The blink to the left in order to turn to the right corrects course when circumstances allow it or requires it.
The first escape valve of the inconsistencies is the exchange gap.
For the moment, this is decoupled from the prices of dollar bonds, which are still close to the recovery values. To some extent, intervention via regulatory changes in blue-chip swap dollar operations along with direct intervention via sale of reserves in the blue-chip swap dollar market allows it. If Argentina’s central bank (BCRA) can buy dollars on the MULC without stepping too much on imports and without triggering a financial disruption on the forced attempt to refinance provinces’ and companies’ debt, it has some maneuvering room to manage the gap.
Anyhow, the scheme is excessively short-term and even if it reaches the finishing line, it will require a change after October. Unlike previous exchange controls, when the “stabilizer” was the dollars in the foreign exchange reserves, this time we depend on the dollars from the “flow” so that it does not destabilize. And the flow dollars depend on fate (soy prices or that the IMF finally issues SDR’s), on the nominal inconsistency risk which might be triggered by the management of the dollar and the rate and, primarily, that no conflict that postpones the exit of the crop emerges. Hence the fact that the threat of more export duties on agricultural exports might last only a weekend.
The zigzag scenario includes some fiscal consolidation consistent with a primary deficit at around 3.6% of GDP, financed 2.1 p.p. through money printing (revenues from BCRA for $900 BB) and the rest through net placements on the peso market. Maturities in pesos and dollars: $1.5 BB and US$10 MM respectively will be rolled over. This implies some sort of agreement with the IMF.
In this scenario, the BCRA reduces the crawling somewhat faster at the beginning, but not that much as the Minister announced. Dollar at $120/$125? With a higher gap 80%/90%? For the moment the rate is not rising and they would only raise it if inflation (held back by exchange controls and a stop to the crawling) does not accelerate. The Government thinks the rise in inflation is temporary.
In this scenario, wages do not beat inflation, which ends up at 43% (wages at 36% and rates at 23%), but they might beat it in the months drawing close to the election. The economy grows at around 6%, largely due to the 2020 statistical carry-forward.
The risk of going into this zigzag and shifting to the unstable scenario in the face of a jump in the exchange gap triggered by political dynamics is still present. But even if the zigzag works, definitions are once again put off until 2022.
