Upcoming Stages: 6/24 – 8/13 – 10/22 – 11/19 – 12/10
19 days before the closing of the candidate lists, both political alliances (FdT and JxC) continue openly negotiating the candidacies in a context where the risks of fragmentation are increasing. The election divided in thirds, as shown by some polls with Milei being the most voted if both coalitions participate in competitive primary elections (PASO), or in fourths if we add the 25% of swing votes who have yet to decide who they will vote for, adds a lot of adrenaline to the journey.
Amid of it all, the inflationary dynamics continue to escalate, increasing by almost 1 percentage point per month since late 2022. From 5% monthly in December, we reached 6% in January, 6.6% in February, 7.7% in March, 8.4% in April, and our projection for May based on our survey of retail prices is 9.2%. The INDEC (National Institute of Statistics and Census) has been reporting higher figures than private surveys in March and April. Will it be lower in May? 8.2% perhaps?
It is certainly science fiction to assign nominality to the remainder of the year considering that the effectiveness (not efficiency) of the exchange rate control measures to stabilize the demand for pesos in a context of severe scarcity of dollars will directly depend on how the hedging mechanisms operate in response to expectations about the removal of capital controls in a future administration. Proposals range from “capital controls cannot be lifted on day one” to “we will immediately lift capital controls, suggesting a formal exchange rate split” to “we will set the Central Bank (BCRA) on fire”.
Logically, the demand for pesos collapses faster if the proposals for more radical regime changes in the face of the current balance sheet of the Central Bank have electoral chances. Over the transition to the next administration, the demand for pesos will also depend on how some of the anchors that have been faintly sustaining the current scheme read that Massa continues to maintain control of the Ministry and/or that the IMF continues to mimic the agreement with the new waivers in each review to release disbursements and prevent the country from falling into arrears, are either maintained or removed.
The priority of the economic policy aims to curb the escalation in the exchange rate gap that occurs whenever the inflation data scares the market. Since late April, the BCRA disregarded the IMF’s warnings and resumed using reserves to limit the rise in financial dollars. Since then, it has used USD980 million from the Reserves to purchase bonds, while simultaneously selling peso-denominated bonds at face value for nearly USD4 billion (in net terms, about half of the BCRA’s position). The intervention in the MEP partially served to offset the daily statistics of deposit outflows from banks, given that the dollars purchased by the private sector from the BCRA initially remain within the financial system.
In any case, the more dollars used to intervene in the exchange rate gap, the more they have to restrict access to the MULC to importers and/or provinces and companies to pay off debts, in an attempt to reach the other side without sending more dangerous signals regarding the use of reserves. Last week, they started with regulations that require provinces to refinance and/or pay their maturities with their own dollars, granting them access to the MULC for only 40%. This situation has been taken to court. These measures are complemented with the extension of payment terms for services, freight, and new agreed-upon regimes for imports of automakers’ and oil companies’.
China has authorized an expansion of the swap facility by an additional USD5 billion, reaching a total of USD10 billion under similar conditions once the first tranche has been used. The newspaper article suggests that these funds could be used for intervention in the exchange rate gap, but it does not look intuitive; although dollars are fungible and the intervention in the gap will continue in order to reach the next stage without a discrete jump in the official exchange rate and so on. The already activated USD5 billion is mostly deposited in a Chinese bank, bearing interest to partially offset the cost of activating the swap. Currently these funds are not being used because doing so has a financial cost that is not present when using reserves. However, the dollars resulting from the swap activation can be used. Meanwhile, the BCRA is encouraging the use of yuan for import payments by shortening the payment terms of SIRA in that currency.
The inflationary scheme is less contractionary than the deflationary one, although increasingly higher inflation rates are needed to sustain it. In 2023, the economy is expected to decline by at least 4% (2 percentage points due to drought and another 2 percentage points due to a scarcity of dollars impacting supply and stocks). Inflation, which has accumulated a 44% increase in five months, would reach 160% for the year if the monthly pace of May is sustained, and it would rise to 240% if the monthly increase of 1 percentage point observed since January continues until the end of the year. The risks of acceleration are heightened by uncertainty during the transition regarding the removal of exchange rate controls but comparing it to 1989 to project the next three months does not seem right.
