Misdirected subsidies and unfeasible export deductions
After the Boden 15 … less liquidity, more solvency
Three steps to rebuild working capital
Divergent agendas to correct relative prices
The payment of the Boden 15 was the last chapter of the Argentine debt reduction saga. A chapter that, as we have argued, has certainly opposing sides: illiquidity caused by the fall in international reserves to around US $ 27.5 billion and an increase in the Government’s solvency as a counterpart of Treasury debt on the market, which is measured in currency represents only 7.2% of GDP, in a world where interest rates will remain low, compared to a situation of public and private over indebtedness seen in developed countries.
This initial situation poses challenges and opportunities for the next administration. Challenges because of the deterioration of the BCRA’s balance sheet -counterpart of debt reduction without fiscal surplus- requires at the start of a strategy of recovering Reserves and in general the country’s working capital. Opportunities, because the initial situation of very low debt in a world where liquidity will be available, provides the ability to progress, limiting the fiscal dominance in the transition and avoiding the traditional adjustments which Argentina has been subject to in the past every time is has faced external constraints up front. The existence of capital controls lets the BCRA, and not the market, be the one to set the value of the dollar. In this regard,Put another way, it was the latter and not the capital controls, those to set a brake on growth. While it is desirable to progressively reduce its impact, it is progressed on both suggested agendas (recovery of working capital and of relative prices), it is wrong to think that its removal alone would connect growth ignoring the implicit adjustment in activity levels and employment that This would generate if done immediately and without an agenda.
As we have maintained, Argentina has not room to accompany the “competitive” devaluations triggered by the capital flight faced by our neighbors. Given the initial inflationary inertia at around 23% against the dollar and utility rates of the semi anchor and the absence of a nominal anchor to coordinate expectations of the scheme of financing the imbalances that has been adopted by the country in recent years, any attempt to abruptly correct the exchange rate, risks resulting in an acceleration of the inflation rate, without the policy gains
While the intention of recapitalizing the Central Bank is the top priority in all agendas, this is not with the proposition regarding how.Therein lies a significant conceptual difference which results in the contrast between dropping capital controls and letting the market set the value of the dollar, compared with an initial strategy where, without dropping capital controls, the Central Bank is the one who defines the value of the dollar in a managed float scheme, while progress is being made in the recapitalization of the Central Bank (strengthening reserves with incentives to settle retained exports, voluntary repatriation of capital and bilateral agreements) and in returning profitability to fiscal through, credit and costs routes . Clearly, the initial fiscal imbalance requires that the necessary reduction of the burden of tax burden on the budget itself, which implies having an agenda.
The flipside of these proposals is the view regarding the current situation of distortion of relative prices. In the analysis of an opposition political space, the argument is that the representative exchange rate of the economy is the marginal dollar rate. With that, they argue that the current government has already devalued and that prices in the economy have already adjusted to the higher dollar rate, so a jump in the official exchange rate “would not generate a significant transfer on prices but would it generate significant positive on investment decisions “. Situation which is not true.
But also, they say nothing about the causes that may have allowed the prices of tradable goods to separate from the international prices allowing to adjust and / or hold against higher costs generated by the “exchange rate appreciation”. Therefore, they omit that for prices of tradable goods to not adjust after devaluation, there should be in parallel to rapid trade liberalization in the economy, without measuring the violent in terms of employment. While there is a contradiction between holding prices and very high protection, it is also true that price sincerity “increasing competition up front” has already shown in the past to generate high costs in terms of employment and destruction of installed industrial capacity.
Even worse, the vision about the possibility of correcting prices allowing the market to be the one setting the value of the dollar, does not take into account either the fiscal consequences, or the consequences in terms of tariff mismatch ex post. On the one hand, the public sector is increasingly less “long” in terms of the exchange rate due to the fall in the tax base of foreign trade taxes and the increased incidence of subsidies within the budget (of which two-thirds have the exchange rate as a component). And considering the latter, adjusting abruptly the dollar rate at the beginning increases, and not insignificantly, the initial tariff distortion of the economy as a significant part of the costs of energy and transportation are in dollars.
It is for this reason that the roads to improve the competitiveness of the external sector, necessary to ensure that the economy generates the foreign currency required to prevent that the increase in the external debt is unsustainable over time, requires a design that aims to maximize its effectiveness Hence the proposal to restore fiscal profitability -export deductions, refunds and ROE- and in parallel financing the $ 70 billion of fiscal cost with an agenda of reduction of misallocated subsidies and thus avoiding deterioration of public accounts at the beginning.
While “all roads lead to Rome” may be true in certain circumstances, to err on the diagnosis and in the order and magnitude of the required measures to enlarge the initial imbalances and lead the economy to an acceleration of inflation (if the recovery of relative prices goes wrong) and / or to a deep recession (paradoxically as a result of it “going well”). For the first time, the global liquidity conditions, the situation of low government debt after the reduction in recent years and the possibility of encouraging certain capital repatriation, would allow attempting an intermediate path that allows re-equipping the economy with the conditions growth starting from the current levels without previously taking steps back in the level of activity. To address the Argentine development,
