From high and competitive exchange rate to low exhange rate under quantitative control
Although this is not new, the commotion and fugacity that is generated by the constant change in the political and economic agenda still surprises. The rhythm of a new event every week, -totally unpredictable, and in some cases generated by errors or omissions of the government-, overlaps with a situation where the inconsistencies accumulated increasingly in recent years begin to surface. Inconsistencies that had been subsumed behind a policy framework that maximized maximizing short-term growth in a context of high but stable inflation, using exchange rate and utility tariffs as anchors. And now it requires increasing currency controls and a tight management of the income distribution to prevent a further jump in inflation, in a context where the two anchors mentioned are progressively being removed.
This is the context on which we forecast for 2013, also taking into account the direct and indirect importance of an improved agricultural harvest after the drought, the recovery in Brazil and the large amounts of pesos dumped into the economy seeking defensive strategies of and investment -with a partially stabilized exchange rate at around 30% and a negative interest rate-. But, fundamentally, on the sharp rise in the supply of dollars that was going to help fund the increase in imports that would result from these strategies. Although this scenario of a better 2013 was gathering followers, in recent weeks new information is sowing doubts regarding the short term, and it will have to be monitored in the coming months. Along this line we have the sluggish September growth data, The final impact of the rain on crops estimates and primarily the government’s strategy facing the election year. Regarding this last item, several questions emerge: Will the forecasts of the reduced need for a tax boost due to increased private spending be fulfilled, or will it have only been a strategy to defend the budget? Will the government’s policies be willing to use more dollars to finance imports until the next agricultural harvest comes in (March-April) or will the rigid control to preserve the stability of the reserves continue? Will there be a cap on joint labor negotiations as there was in 2012, or as it is an election year this political cost will be avoided? And finally, which strategy will be adopted regarding the recent ruling in favor of the holdouts ?; These responses will define the year 2013 and the transition towards 2014.
In early 2007 we published a report entitled “Speed train to full employment … Slow train to development”. In it we stated that the model of a high exchange rate that was in fact was from a development strategy, but could be defined as a “one quick trip towards full employment in a context of high inflation”, a situation that was permitted by the unprecedented international prices and the expansion of the agricultural frontier given the extension through time of the closure of the external current account. Five years later, the economy grew at an average of 4.7% per year, -roughly in line with the rest of the region- GDP per capita in dollars doubled (from US $ 6,700 to US $ 12,500), the unemployment rate hardly improved since then ( 7.5% in late 2007 vs. 7.2% currently, very close to full employment) and the inflation rate is around 24%, -between four and five times the average for the region excluding Venezuela-. There is still time to try to exploit the global context of low rates until mid-2015, weak dollar and high prices for our exports. But this requires more than just readapting the speech, which has gone from stressing the advantages of the high exchange rate, to emphasizing the advantages of a low exchange rate, high inflation and an “extremely” aggressive control of foreign accounts in order to sustain, even further than 2013, the balance provided by the exchange rate appreciation (in macro terms) of around 15%. weak dollar and high prices for our exports. But this requires more than just readapting the speech, which has gone from stressing the advantages of the high exchange rate, to emphasizing the advantages of a low exchange rate, high inflation and an “extremely” aggressive control of foreign accounts in order to sustain, even further than 2013, the balance provided by the exchange rate appreciation (in macro terms) of around 15%. weak dollar and high prices for our exports. But this requires more than just readapting the speech, which has gone from stressing the advantages of the high exchange rate, to emphasizing the advantages of a low exchange rate, high inflation and an “extremely” aggressive control of foreign accounts in order to sustain, even further than 2013, the balance provided by the exchange rate appreciation (in macro terms) of around 15%.
