The worst possible legacy

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Charles Perez

Coordinating Director of the Capital Foundation

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The recent measures announced by the economic authorities: use of foreign currency bonds of public bodies – to obtain financing and limit the advance of financial dollars – reveal the economic risks to monitor. On the one hand, the risk of “stress” of the public debt in pesos, deriving from a possible greater monetary issue. On the other hand, the risk of a slight rise in the official exchange rate, given very low net international reserves and a growing exchange rate gap.

After the latest public debt swap, again there are maturities between March and September of the order of 10 trillion pesos, of which around 3 trillion which expire from today (the tender of 03.22.2023) up to and including June. And those second quarter maturities are held by private investors and not captives, which is why significant currency issue risk is significant. Suffice it to recall last year, that due to the purchases by the Central Bank (BCRA) and the financial system of public bonds in pesos, the primary monetary expansion exceeded 2 trillion pesos, three times the monetary target agreed with the International Monetary Fund (IMF).

There is also monetary debt, represented by the monetary base, leliqs and steps. These monetary liabilities have long ceased to be instruments of monetary regulation since then there are no more international reserves which support them in the budget of our BCRA. Currently, the 17 trillion pesos of monetary debt finance the public debt, in the portfolio of the Central Bank.

All this short-term public debt (peso bonds and BCRA monetary debt) is too much for Argentina’s primary fiscal result. Recall that the reported primary fiscal deficit last year was 2.4% of GDP, while the real one was 3.5% of GDP, if we add property income, Treasury debt to the BCRA per dollar of soybeans and the rising floating debt of the national government. And if we calculate the recently decided increase in spending on family allowances and the pension moratorium, we get there a structural primary deficit of the order of 4% of GDP. With such a fiscal deficit, voluntary financing becomes difficult to obtain. Hence, the monetary issue may be considerable, as it was during the year 2022.

Even greater is the currency risk. With two years of sharp exchange rate lag, plus a widening exchange rate gap; it is impossible to accumulate reserves. The dynamics in dollars are worrying; In December 2022, net international reserves exceeded 9,000 million dollars, while they now stand at around 1,500 million dollars, with a turnover close to 2,500 million. Due to the drought, agricultural exports will fall by more than 50%, adjusting imports with a decline of more than 20%. Just as net international reserves increased by $5,000 million last year, this year reserves could decrease by about $10,000 million, generating high voltage in the BCRA dollar boxmainly in the second half of 2023.

The heavy legacy

The government does not want to restructure the public debt in pesos and intends to avoid a discrete devaluation of the currency, even if there it is not so clear that “want” is “can”; Yes, OK the “hold on” scenario is the most likely.

However, the economic scenario sought by the government is not pleasant. A large fiscal deficit makes it difficult to obtain genuine financing, so monetary issuance can be quite large, with net international reserves approaching zero. Then, the economic costs for this year are in sight: more exchange rate gap, more inflation and more recession.

A heavy legacy remains for the new government. Argentina is going through more than 15 years of “stagflation”. This year the Gross Domestic Product (GDP) per inhabitant will be the same as in 2006. And, in terms of inflation, the situation is very bad: between 2007 and 2013 it was on average 20% per year, then we went up to 40% between 2014 and 2020, 50% in 2021 and over 100% year-on-year currently. With a “poverty” ratio of the order of 40% of the population, with the aggravating circumstance that half of the poor of working age are employed.

However, the current Plan HoldWhat legacy will he leave to the next government, in terms of economic policy?, assuming the exhaustion of the current economic model.

When we examine the Agreement signed between Argentina and the IMF in March 2022 and its evolution, with objectives considered achieved, we clearly see that almost two years will have been lost, piling “junk” under the rug. Inconsistent agreement, economic targets accommodated and if so, that with the Agreement and “only formal” compliance with the targets, the economy did not grow between December 2022 and the same month of 2021 and inflation almost doubled.

THE devaluation seems inevitable, it’s an honesty, today we have more than 10 exchange rates. And if the soybean dollar hadn’t exploded twice last year, at least net international reserves would not have increased. With the current official exchange rate arrears, plus an exchange rate gap close to 100%, the natural tendency is away from the need to accumulate reserves.

We should seek a new agreement with the IMFthis time coherent and looking for the externality of the improvement of the financing conditions, since from the year 2025 we begin to have dollar debt maturities of no less than $10,000 million a year.

If you try to lower inflation by removing fiscal dominance from monetary policy and not default, the tax adjustment will have to be substantial and sustained over timegiven that the deficit is high and the formal tax burden is high.

A final observation, the shortage of international reserves in the BCRA makes it difficult to unify the foreign exchange market, therefore the decision to transform the MOC (official foreign exchange market) into MULC (single and free foreign exchange market) could be immediate, even self its implementation must be gradual.

This heavy legacy that the next government will receive, and which is necessary in terms of economic stability, will have to be accompanied by a growth plan that supports this adjustment.

Source: Clarin

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