Next Milestones: 6/21 – 8/13 – 10/22 – 11/19 – 12/10
The closing of the election tickets defined the electoral offer ahead of the Primaries (PASO), where only Juntos por el Cambio (JxC) goes with competitive lists. The first information provided is that, at least until the PASO, Massa continues to be a minister, diluting the risk of resignation (and unmooring) that appeared several times in the midst of the discussion over candidacies. This news, combined with the perception of Milei’s being on the wane, triggered a sense of “joy” in the markets, extending the recovery of stock and bond prices and stopping the spike of the exchange rate gap in the face of elections.
Once again, Massa gained time, and during the remaining 40 days until the PASO, he will try to manage this time without a sudden jump in the exchange rate above the crawling peg. To achieve this, he will continue to use dollars from reserves to finance the transition in a context where negotiations with the IMF –with a deviation from the international reserves goal of USD14.4 billion in June –, are once again under tension after the IMF’s demand to stop selling dollars cheaply. After Friday’s payment to the IMF, net international reserves (own reserves) would be negative by USD5.2 billion, while liquid reserves (not necessarily own reserves) would stand at just USD1.5 billion.
Let’s remember that the PASO define candidacies within JxC and electoral preferences (they are the first major national poll), but they do not determine positions (neither president and vice-president, nor any of the hundreds of positions contested on the lists). Hence, the tension to try to maintain the exchange rate scheme until October 22, regardless of whether the result of the PASO seems to define the presidential election without a runoff.
The most likely scenario as of today is a “half and half” scenario (Milei obtains around 20% of the votes), JxC does not manage to win in the first round (obtains around 40%, but the difference is not within 10 p.p.), and Bullrich wins the internal election within Juntos por el Cambio. Paradoxically, this is the scenario desired by Massa, considering that if a Moderate-Hawk polarization occurs, part of Larreta’s votes could go to him in a runoff. It is true that the campaign has not yet begun, and things can happen. As was demonstrated in 2019, polls can be inaccurate.
Once again, a risky electoral strategy, abusing “borrowed” reserves, can end up becoming a boomerang if the macroeconomic situation becomes disorganized and the angry vote ends up being capitalized by Milei. Although, unlike in 2019, the Peronist party is currently in power, there are exchange controls (cepo), and the expectation of change is driving capital inflows.
The logic is that, the day after the PASO, regardless of the result, JxC aligns itself behind the elected candidate with a discourse that seeks to capture the votes of the other side; if it were Patricia, the moderate vote. There are two feasible threats from the opposition that could cause harm during the transition in an attempt to ensure that the adjustment is accelerated. One is to put pressure on the current government to carry out the fiscal tightening by intensifying negotiations with the IMF, under the risk of the country falling into arrears. The other is to announce the dismantling of the capital controls from the beginning or to advocate for formal exchange rate split to force a devaluation of the exchange rate.
For now, in the race to the primary elections, Larreta openly states that exchange controls cannot be lifted immediately and proposes a roadmap for their dismantling. Bullrich is more ambiguous in her statements, flirting with the formal exchange rate split proposed by Cavallo and the need to act swiftly, while also being cautious, no longer talking about the “peso bomb” and emphasizing the respect for contracts. Even Milei openly talks about how an immediate removal of exchange controls with the current balance of the Central Bank would lead us directly to hyperinflation. Is Baglini’s Theorem operating ahead of time?
Meanwhile, Massa is negotiating simultaneously with the IMF and with China. With the IMF, he seeks a waiver for the deviation in the first quarter in order to unlock the USD 4 billion (the expectation that the disbursements for the year will be advanced to us has been left behind). With China, he aims to activate the second tranche of the swap for USD 5 billion to replenish liquid reserves. Even if the disbursement from the IMF is unlocked, the next review is scheduled for September, between the primary elections (August 13) and the general elections (October 22). By then, depending on the outcome, the IMF will have more than one interlocutor.
For now, the timing regarding the only question we received about when and how to hedge against the electoral scenario is postponed due to the influx of capital triggered by the closing of candidate tickets. It is very costly to hedge ahead of time (not only losing the 8% monthly carry trade but also the exchange rate gap since access to the MULC is lost) but the path to the next government is far from clear.
In the second half of 2023, the scenarios depend on the campaign discourse of the candidate with the highest electoral chances, the market’s reaction to the campaign discourse and the expectation of change, how the IMF responds to conflicting pressures, and, fundamentally, whether the “abusive use” of dollars from bank reserves to manage scarcity ends up leading to a dangerous deposit outflow. In 2024, the scenarios depend on the stabilization program that is effectively adopted, the initial conditions (nominality and deterioration of the Central Bank’s balance sheet), the supply of dollars and the governability built to implement the measures.
