The advance of inflation is reducing the competitiveness of the official dollar from week to week and increasing uncertainty in this regard until the Government is able to sustain the current strategy of correcting the exchange rate by only 2% per month.
The evolution of inflation and the dollar are the keys that will make the reforms that Javier Milei’s management intends to undertake practicable or not.
“Faced with a next quarter of high inflation that rapidly erodes competitiveness gains following the December devaluation, the possibility of supporting creeping picket of the monthly exchange rate of 2% is limited“warns the Capital Foundation (FC) in a report.
From the consultancy they designed three possible scenarios for the evolution of the dollar and inflation.
The first assumes a notable moderation in inflation starting from February. The consumer price index (CPI) would be in the 21.1% in January, dropping to 10% in February, at 7% in the month of March and towards 6% in April.
AS, “the economy would still maintain a certain cushion of competitiveness towards the months of April and May.” In April the exchange rate would still be 31% above the November 2023 level (before the exchange rate jump) and 27% more in May.
In any case they warn that”A creeping picket “it is necessary to avoid a constant decline in competitiveness in the future”.
The second scenario considers “a more complex dynamic”, where inflation stood at 21.1% in January and remained around 18% in February and 15% in March, reaching only 10% in April.
“Given that the fight against inflation is increasingly challenging, the current exchange rate sliding pattern is unsustainablecoming into conflict near the start of the bumper harvest.”By April the bilateral real exchange rate would be 9% higher than in November, when it was already lagging, and By May virtually all increases in competitiveness would have been eliminated. “In this case, doubts about the exit from the current regime would be accentuated and would give rise to speculation about a new increase in the exchange rate”, underlines FC.
In the third scenario Inflation remains at the same level as December -25.5%- for all months. “Here the loss of competitiveness is even more dramatic, completely losing the gain resulting from the devaluation already in March. In this case, the exchange rate decline of 2% per month would have a short trajectory.”
Forecasts from the Central Bank’s Market Expectations Survey (REM) place the official dollar at $870 in February, $995 in March, $1,100 in April , $1,186 in May and $1,297 in June.
In the EcoGo base scenario “the exchange rate gap remains limited (20% at the end of the year?) and inflation reduces in the last quarter to around 5/6% per month and the year ends with slightly lower accumulated inflation 200%”.
Alternatively they run a “bad” scenario where “Inflation and the currency gap are not easing. The abuse of creeping picket well below inflation forces the BCRA to make an exchange rate jump in July/August which increases the inflation rate once again. In this economy, inflation remains high and the year ends with an inflation rate close to 400% with an exchange rate gap close to 80% and a country risk once again above 2,000 basis points”.
Source: Clarin
