Pulling rabbits out of hats
The title is a provocation, and as a friend told us, very unmarketable. However, while the scheme is full of holes and the attempt to kick the can down the road until the next administration takes over still coexists with the transition risk that we have been mentioning reflected in a peso bond market with no private buyers after the 2023 primaries, time is stretched. It’s been almost four months since Massa was appointed Super-minister and the original principle of not abruptly devaluate the official dollar is being fulfilled to the letter.
The tool to split the exchange rates “whatever it takes” coexists with a new soybean dollar at $230 and with agreements with companies and/or sectors to cap price increases at 4% per month until March. In return, companies that sign the agreement are offered direct access to the official dollar at $168 to import inputs and the promise that the devaluation, which today is at 6.5% per month, will wane as from January.
The scheme adopted is perverse: it increases the excess pesos in the economy plus the monetary financing of the fiscal deficit (indirectly through the purchase of BCRA (Argentina’s Central Bank) bonds in a saturated market) and does not solve the shortage of dollars the BCRA faces (it only forecasts the settlement of agribusiness dollars halted until the emergence of a new differential dollar while managing the access to the MULC for importers who accumulate a jump in debt of USD9 BB over the year). Many of the tools announced to get fresh dollars fall into oblivion until further notice. But there are no doubts about the creativity and audacity to negotiate them.
The IMF looks out of the corner of its eye and does not object, either to the BCRA buying expensive dollars that later sells cheap or the BCRA buying bonds in the secondary market and indirectly financing the Treasury outside the limits established. In fact, it has just announced that Argentine has met the (adjusted) goals for the third quarter and that USD5.8 BB of the disbursement scheduled would be paid to the BCRA before the end of the year. This, together with the greater settlements resulting from the new soybean dollar and a tailor-made administration of import dollars, would allow the BCRA to get closer to the reserves target for December and continue to buy time.
Regarding pesos, it is a month to go for the year to draw to an end. The Treasury still must get pesos for almost an additional $1 BB between the fiscal hole and the market maturities. They have already called on the provinces, municipalities and financial institutions on an attempt to extend the terms of a debt that coexists with 100% of parity (IRR 2.5% plus CER) until March 2023, 96% of parity (7% IRR plus CER) for August 2023, 88% (12% rate plus CER) for March 2024 and 65% (18% rate plus CER) for November 2025).
At first, and beyond the difficulties that the Treasury is facing to obtain the pesos, the BCRA will continue financing through a combination of debt purchases in the secondary market (later swapped) and the use of temporary advances. Of course, at the cost of monetizing part of those pesos, which must be sterilized with Leliqs after increasing bank deposits. Surely, public banks will have to do the job in a financial system where credit to the public sector (Treasury and Central Bank) represents 49% of assets while credit to the private sector represents only 28%. The latent risk behind this situation is always the exchange rate gap, the reaction of the interest rate and the inflationary dynamics.
In 2023, considering that 40% of exports are sold at a 40% higher differential dollar and that fiscal deficit stands at 1.9% of the GDP agreed with the IMF, money printing would reach more than 6 BB. This is added to the net purchase of dollars that the BCRA should make next year to meet the net maturities of the national and provincial public sector and the private sector with organizations and the market (an additional $2.2 BB without considering the accumulation of reserves). In any case, the two main assumptions to define the monetary scenario are given by the interest rate (currently neutral, but which will probably turn positive if the gap tends to spike) and fundamentally by the drop in real terms in the demand for free pesos. Stopped as of November, the free pesos (circulating amount + sight deposits and savings account) grew 25 p.p below inflation. For the moment, the rabbits pulled out of hats have been allowing them to play a cooperative game with a private sector that continues to take advantage of the carry trade at these rates waiting in line to access the official dollar while they undo the Rofex/dollar-linked coverage and start to look for coverage in Argentine assets in dollars at auction prices trying to prevent access to Blue-chip swap dollar/ MEP that would block their access to the MULC given the cross-regulations. There is a long way ahead, the world and the drought are not helping, and the rabbits will not last forever if cooperation in the transition does not appear. However, it is worth noting that the first signs of cooperation appeared last week after the presentation of the economic program of one of the JxC candidates.
