The first phase of the “Caputo plan”, in progress since last December 13th, envisaged a strong liquefaction of the pesos circulating in the economy: real balances collapsed in the face of inflation which skyrocketed to 25.5% in December, especially after that of last month Devaluation jump of 54% and with a strong reduction in interest rates.
Hand in hand with the 118% increase in the official dollar a month ago, one of the main measures adopted by Luis Caputo when he took over the leadership of the Treasury Building was to coordinate, together with the Central Bank, a change in the strategy of monetary policy.
The Central Bank has “removed” the Liquidity Letters (Leliq) from their role as a reference rate for monetary policy and has decided to replace them with the repo rate.
At the same time he announced that he will not renew the Leliq title and, in fact, the last race was held last Thursday.
At the same time, the BCRA reduced the yield on repurchase agreements (which are promissory notes with daily maturity and are 100% per annum) and validated a sharp decline in fixed term rates, for those made by both companies and savers.
The latter were also affected by the reduction in pre-cancellation rates of fixed terms linked to inflation, UVA, and the update of their minimum placement period, which went from 90 days to 180 days.
The objective of the economic team is to channel the excess liquidity of the banks into the auctions of Treasury securities, but the rate that Caputo validated in his first market test turned out to be very negative also compared to the evolution of prices: just 8, 66% effective monthly return.
All this has translated into a sharp contraction of the monetary base: last month the sum of money in circulation and pesos deposited in banks decreased in real terms by 8.5%.
“For the BCRA this means less issuance at interest and for depositors a liquefaction in real terms,” they indicated in the consultancy firm PXQ. One market trader put it in more drastic terms: “There is nowhere to run to escape inflation.”
Migration
According to Quantum Finance, the consultancy firm of economist Daniel Marx, “just as until a few weeks ago money market funds (money market funds, which manage daily liquidity) partially replaced time deposits, the fall in the real interest is leading to new defensive behaviors, in this case with the migration towards t+1 funds (fixed income in pesos with repayment in 24 hours), partly reflected in the strongly negative returns of the CER or dollar-linked adjustable debt.
The risk they see in the City is that the financial repression which implies strongly negative interest rates compared to the prices of the economy, added to an exchange rate which resists much more than what was expected before the inauguration of Javier Milei, will end up put greater pressure on the exchange rate gap.
The gap went from the unexpected single-digit level in the final week of 2023 to above 47% earlier this week.
At PXQ, the consultancy firm directed by economist Emmanuel Álvarez Agis, he explained that the current monetary plan can pursue two different objectives, although not necessarily mutually exclusive.
They explained: “If the goal is to proceed towards a stabilization plan, the loss of purchasing power of the peso stock can have a recessive impact, aiding the goal of reducing inflation. In this plan, liquefaction is combined with a fiscal and income squeeze, with a subsequent (when there are dollars) opening of imports which increases the supply of goods.”
Together, they added in PXQ, the recession and external competition will be the elements that will help reduce inflation. However, they also warned: “The monetary plan could be an intermediate step towards thedollarization of the economy.”
From this point of view, the Government could leverage the Bopreal auctions, the dollar bond that was offered to importers to cancel the debt contracted by the BCRA, todollarise part of the peso stock; and at the same time, negative interest rates would accelerate thedollarization of portfolios. This hypothesis, for now, does not find the consensus of market analysts.
The risks of the plan
For now the “blender plan” represents a mystery for the market. Economist Andrés Borenstein, of Econviews, declared: “We can say that what we have seen is the first phase of a plan, what is missing is precisely that second phase to know whether we are going towards a stabilization program or towards dollarization. What we know is that this liquefaction will have an effect on the financial system. “We started with a small financial system, which after this month has become even smaller: the risk is that when the program ends, the banks will not be able to act as a driving force for the reactivation of the economy.”
In the short term, the incipient widening of the currency gap, the still low appetite for Bopreal from the importing sector and the acceleration of inflation appear as the main risks of the current plan.
“The gap hasn’t widened yet, but it could. With these levels of gap we could speak more of a reorganization, even if this raises some alarm. The decision to ratify the creeping 2% rate for this month, with inflation unlikely to fall below 25% in January and real rates still very negative, could start to show the first cracks in this program,” said Lorenzo Sigaut Gravina. from Equilibra.
The economist warned that the inflationary acceleration of the first quarter could “devour” the competitiveness acquired by the peso after the last devaluation and that, if at the same time the gap were to rise above 60% or 70%, this would put a strain on incentives for exporters to liquidate the harvest, especially in key months, such as March and April.
“The government has resorted to a very delicate strategy. We cannot yet speak of a stabilization plan, but rather of a strategy to gain time and in the meantime restore the Central Bank’s balance sheet. Demand for Bopreal can still recover, the agreement with the Fund will perhaps unlock the arrival of new funds for March,” he added.
The other piece of the puzzle, for Sigaut Gravigna, is to see how the DNU and the Omnibus Law will be articulated in Congress.
“Milei needs to take advantage of her popularity and her first 100 days of honeymoon. The December devaluation was blamed on the previous government, but if it were to reconfirm a decent jump in the exchange rate in the first or second quarter, society could end up requesting it,” concluded the economist.
Source: Clarin
