The dollarization of Milei and its risks: the warning of a consulting firm listened to by banks and think tanks

Presidential pre-candidate Javier Milei steadily advances in the polls. Furthermore, forecasts place it in the top three; some even put it in the background and with a scrutiny definition. Faced with this scenario, he echoes one of the fundamental principles proclaimed by the man of La Libertad Avanza: dollarize the economy. In the last few hours, this idea has been put to the scrutiny of two consultancy firms, one very listened to by the banks, the other a think tank.

At the moment the economist and candidate is at the Llao Llao and at noon he will be a speaker at the lunch that will be held on the second day of the Forum. His main axis will be to explain how he would carry out the dollarization that he proposes.

Advisory document 1816 questions the feasibility of this process and also warns of the risks. “It could even generate a sort of self-fulfilling prophecy: that peso holders fear dollarization and in an effort to get rid of their holdings, the conditions are created for dollarization through a massive liquefaction of securities”details.

One of the biggest difficulties they see since 1816 is that it is difficult to dollarize in an economy that has no dollars. “Today the monetary base is $5.4 trillion, which at the current CCL of 400 is $13.5 billion. All told, Argentina only has $1.8 billion in net reserves, so it would need to raise another $11.7 billion to be able to save the base,” they say.

And in this sense they warn that, although the number is not huge, “the disadvantage is that the liabilities of the BCRA are not only the basis, but also the Leliq/Pases, which total $12.5 trillion, more than double the base. Buy back the monetary base and the Leliq a total of US$ 44.750 million is required for the current CCL. Read, another Stand By loan like Macri’s”.

Another point is that according to Milei’s plan, dollarization would not be done only with the reserves of the Central but with the income of dollars from abroad. And to that effect, they warn that this “would require a level of world confidence in the plan that is nearly impossible by 2024.”

Fundar’s analysis

The second report, that of the Fundar research center – the think tank chaired by the economist and entrepreneur Sebastián Ceria – in the same sense: “To go down the road of dollarisation, one must solve at least two fundamental problems: exchange all pesos in the economy for dollars and align public sector revenue and expenditure flows“.

That today “either way, implies a large adjustment and a considerable loss of purchasing power”warn Emiliano Libman, Juan Martín Ianni and Guido Zack, who prepared the report.

In response to Milei, without naming him directly, from Fundar they point out that those who defend this path “assume that the A mere announcement of dollarization and the necessary reforms to apply it would be enough” to restore confidence international markets in Argentina and generate “a shower of investments” to avoid this deficit.

“However, the experience of Ecuador, Panama and El Salvador shows us that the situation is more complex”they warn. And they add: “In these cases, dollarization has exacerbated or at least not helped to reduce economic volatility.” And in this sense, they explain it “it does not eliminate the possibility of incurring situations of unsustainable fiscal deficit and debt” and, therefore, neither “does it imply an improvement in the financing conditions of the public and private sector”.

So, from the consultancy they indicate that for successful dollarization some additional conditions are required such as “reduce the fiscal and trade deficit to financeable levels, build up international reserves, align relative prices (exchange rate and tariffs) and make an incomes policy to curb inertia, since if maintained it could cause residual dollar inflation which undermines competitiveness”.

A little less moderate, on Monday, Emmanuel Alvarez Agis, former deputy minister of the economy during Cristina Kirchner’s second term and head of the consulting firm PxQ, questioned the “Dollarization Ideas” of his libertarian peer and accused him of trying to breed a “bank run”. “If someone says that his economic program is to set fire to the Central Bankwhich is the body that regulates banks, e I don’t have any money in the bank”condemned.

Do’s and don’ts, according to Fundar

• Generate real and lasting incentives for saving in pesos: to restore the currency’s function as a store of value, the interest rate on peso instruments must be higher than the expected inflation and return expectations of dollar-denominated alternatives. For this, it is essential to avoid jumps in the exchange rate.

• Establish prudential regulations and coordination policies: it is necessary to encourage deposits in pesos through required reserves lower than those denominated in dollars and insurance of deposits only for those in pesos. To promote the use of the national currency as a unit of account and means of payment, resolutions are needed which induce the quotation of prices in pesos.

• full markets: to strengthen the local currency’s store of value function, it is essential that the public sector be able to offer short, medium and long-term instruments in pesos, so that banks can also offer peso loans to the private sector at different maturities.

• Promote de-indexing of contracts: While indexation allows the currency to maintain some of its functions in inflationary environments, it does so at the cost of entrenching inertia and establishing a hard-to-break inflation floor.

• Maintain prudence regarding the circulation of the dollar: If the dollar is allowed to circulate, strict control policies are recommended to avoid saving in that currency outside the system and the risk of increasing the degree of bimonetarianism.

What not to do:

• The mandatory weighting of dollar deposits it is not effective because it strengthens the incentives to save in foreign currency.

• THE the destruction of public statistics undermines trustespecially when the profitability of peso instruments is linked to inflation.

• Non-compliance with debt commitments in pesos it is not necessary and it is the most drastic way to punish the national currency.

• Restrict access to the foreign exchange market only in extreme cases, as they generate large distortions and counterproductive incentives.

NS