Everything comes around, everything moves on, everything comes in due time…
Although the BCRA (Argentina’s Central Bank) finally “sewed up” the hole in the peso market, triggered by the explosion of the bond market last June 8 (purchasing bonds, sterilizing pesos issued with Leliqs and Repos at higher rates and issuing a Put that ensures the banks the exit of the new Treasury bonds that they underwrite), the need to stop the drainage of reserves by blocking the access to the foreign exchange market in the last days of June and Guzman’s resignation once again triggered the hedge demand and, simultaneously, the exchange rate gap and inflation at record levels.
The mere announcement of the reorganization of the government and the cabinet following the entry of Sergio Massa as a super-minister of economy triggered a significant recovery in asset prices from the depths they were in (+25% in dollars, to USD23/27 depending on the instrument) and a drop in the exchange rate gap, which after the peak of 160% last Monday stands at 120% at the close of this report.
The full members of the new organization chart of the State and with which powers Massa takes over are still to be defined. This requires a decree from the Executive Power still unwritten. Primarily, it remains to be known what names will accompany the super-minister. And whether he is going to deploy a stabilization program or just a political reorganization in order to underpin the model of financial repression and gaps the country has fallen in since the present administration took office, stopping wrecking the agreement with the IMF and attempting to approach the fiscal deficit and monetary financing guidelines, validating a crawling peg of the dollar and increasingly higher interest rates.
At the moment, there are no definitions about changes in the BCRA, which remained active during the week, raising interest rates sharply and providing foreign exchange coverage. For now, and in the immediate term, the devaluation jump to compress the exchange gap would not seem to be part of the tool kit. The BCRA renewed the futures contracts that expired in late July and sold more than USD7 BB, of which 80% expires in late August.
It also advanced with a Kafkaesque scheme to give soybeans exporters a higher dollar, allowing producers to buy with part of the pesos obtained from the settlement at the official dollar, the so-called “solidarity dollar”, at $237 and creating a BCRA instrument indexed to the dollar so that banks can offer producers exchange insurance through a deposit in a dollar-linked sight account.
Unlike other exchange rate splitting in the past, where the dollar for exports was lower than the dollar for imports (the BCRA bought cheap dollars and sold them at higher prices), this time the government is trying to keep the dollar for imports low and temporarily raise the dollar for exports, which in the case of soybeans is already lower due to export duties. A monstrosity that attempts to last until September as if the oasis would materialize that month.
The BCRA’s lack of reserves, and the fall in the settlement of exports is what hinders the arbitrage scheme between gaps and threatens to further escalate the nominality of the economy and hinder growth in a disorderly manner due to the allocation scheme of the few dollars available. With net reserves of around USD2.3 BB (USD1.9 BB in the IMF’s calculations, not counting the working capital the agency gave the country to pay maturities against itself), the BCRA barely had dollars for only 10 days of imports. In fact, in July, the dollar account dopped by more than USD4.5 BB (about half due to amortization payments to the IMF) with sales to private companies of around USD1.3 BB (of which USD500 MM were loan repayments).
Even approaching the fiscal and monetary goals included in the agreement with the IMF, if the exchange gap is not significantly narrowed, the demand for official dollars will continue to be infinite, and the carry trade that can coordinate the new level of the marginal dollar to the new interest rates might have, once again, a near end.
The new team should advance in a stabilization program that aims to reduce the exchange rate gap, the interest rate gap and go ahead with a logical price system, simultaneously aiming at aggressively reducing the fiscal deficit and cushioning the distributive effects.
For now, the Massa operation is focused on “negotiating” the new structure of the State and the string it will pull, while putting together a team and a plan. “Everything comes round, Everything moves on, Everything comes in due time” may, once again, turn into an infinitive loop.
