Sunday Horse He returned to analyze the Argentine economic situation during the presidency of Javier Milei. The former Minister of Economy highlighted the evolution of financial indicators, but wondered whether a “significant reduction” in inflation was “close to the horizon” and spoke of the entry into a “deep recession”. Furthermore, he said that it will not be possible to successfully exit the exchange rate in the middle of the year.
“How close are monetary unification and liberalization?” is the title of the latest analysis text that she published on his personal blog. There he examines the current situation of financial indicators, dollar quotations and prices and also analyzes their possible short-term evolution.
For Cavallo, financial indicators, such as the reduction of the currency gap, are “favorable”. But he cautioned that they “should not be taken as indicators that a significant reduction in the rate of inflation is on the horizon.”
On the behavior of priceshe added later, a “strong inertia” because real salaries and pensions have already reached “their minimum level” and “from now on they will have to increase, monthly, at a rate no lower than the monthly inflation rate of the previous month”.
Referring to the level of activity, he assured that the indicators of the first two months of the year indicate this “We have entered a deep recession” with “dramatic” levels of decline in activity in the construction sector.
Regarding the combination of falling inflation and economic activity, as well as rising dollar prices, he asked to “pay attention to the evolution of the real exchange rate in the official market”, to the “evolution of dollar deposits in the system banking” and the “channeling of dollars outside the system towards the local capital market.
The father of convertibility anticipated that he does not believe it is possible to “successfully reunify and liberate the foreign exchange market mid-year.” On Friday evening Luis Caputo had also ruled out the possibility of immediately withdrawing the shares, while considering strengthening the Central Bank’s reserves. But Milei assured that the dollars from the harvest will create favorable conditions for eliminating the trap in mid-2024.
Domingo Cavallo and Javier Milei in a television crossover. Now, the former minister has asked the president for moderation due to the running out of supplies.“If the right decisions are made, these conditions are unlikely to be reached before the end of the year,” he underlined in another passage of his blog post. And she reiterated her recommendation accelerate the pace of devaluation of the official dollar.
In this sense, he asked that “the pace of active peg crawling” be adjusted “to a pace closer to the rate of inflation”, as he had already done in previous analyses. For now the Government maintains the monthly rate of 2% and Milei himself has denied a new devaluation measure.
Why Cavallo says it’s risky to abandon stocks mid-year
He then underlined the points necessary for exchange rate reunification to be achieved in 2024. Among these, he recommended “formally dividing the exchange market so that instead of the CCL a truly free exchange market operates, in which the Central Bank and the National Securities Commission does not operate. “intervene.” And also recommended, once again, to “adjust the pace of the crawl” so that the gap disappears “naturally.”
Finally, he summarized the keys to a successful exit from stocks and reiterated that doing so mid-year carries the “risk of failure.”
A hug from Milei and Caputo. Both highlight the zero deficit as “non-negotiable”, but Cavallo argues that it is not enough to get out of the trap. Photo by AFP“From that moment on, the trend of the unified and free exchange rate” should tend “to appreciate, so much so that to stabilize it the Central Bank will have to purchase reserves”, as the body chaired by Santiago Bausili is doing.
On the other hand, he underlined, “if to stabilize the exchange rate the Central Bank were to intervene by selling reserves, this would mean that macroeconomic stability was not achieved even when the fiscal deficit disappeared”in reference to one of the signals that both Milei and Luis Caputo look most closely at (“The zero deficit is non-negotiable”, they repeat almost in unison).
Therefore Cavallo concluded: “This is why a hasty reunification and liberalization, let’s say in the middle of the year, risk failing.”
Source: Clarin
