Is the exchange rate lagging? This question has become central to the economic discussion. The evidence would suggest that “neither”. Measured in official dollars, some products in the consumer basket have a value not much different from those abroad. In some areas, like clothing and electronics, we are expensive; in others, like cheap food or restaurants. When we take a broad basket and evaluate it with historical perspective, it appears neither expensive nor cheap; rather, average.
The problem is not whether we are expensive, but the certainty that this will happen soon we will be, if the government continues with the strategy of adjusting the official exchange rate to 2% monthly, below inflation. We at Equilibra estimate it in the second quarter inflation of between 25% and 30% would accumulate.while the official exchange rate would rise only 6%. Inflation would remain high due to the strong tariff adjustments in place gas, electricity and transport. The rest of the prices, however, would continue to slow down due to the exchange rate and wages they would travel below inflation by the brutal drop in demand It would strangle the margins of companies and businesses.
Our projections suggest, therefore, that we would have an exchange rate at the end of June equivalent to $725 at today’s prices; it’s worth saying 16% down from $865 how much is the wholesale dollar these days. I would be a delayed exchange rate, similar to that at the end of 2017when the Argentine economy accumulated an external deficit equal to 5.2% of GDP and was moving towards a serious currency crisis.
The government will most likely maintain its path towards exchange rate backwardness because it pays off in terms of disinflation. He also doesn’t seem to see it as a problem. This makes it clear that if the fiscal deficit is eliminated, the value adopted by the dollar will no longer be valid should not cause concern because ultimately it would be a price determined without the State issuing money to finance its deficit.
There are two problems with this reasoning. The first is that the determination of exchange rates is strongly influenced by the restrictions that weigh on both the foreign exchange and bond markets (MEP and CCL); that is, again We don’t know what the value of a truly free dollar is.
The second is the extensive historical evidence regarding backward exchange rates in situations of fiscal surplus. An example is the Chilean economy before the 1982 exchange rate crisis.
The problem is, perhaps, more conceptual. Many of us believe that, in the coming years, Argentina will have to maintain a significant trade surplus to generate a positive flow of dollars. Our country has public debt obligations, overdue debts to importers and also needs to accumulate reserves in the BCRA to ensure macroeconomic stability.
We are talking about many dollars: a stock of no less than $25 billion in overdue commercial debt and around some $10,000 million in national and provincial government debt services per year.
Let’s add to the account a modest annual reserve accumulation target of another 10 billion dollarsto reach the end of 2027 with a reserve stock of approximately 5% of GDP. Nothing very challenging: Peru, a bi-monetary economy like ours, maintains a stock of reserves equal to approximately 30% of its GDP.
We do not see on the horizon – let’s say, at least until the mid-term elections – that the country will be able to receive external financing on a scale that would cover not only these needs, but also a current account deficit, even if the fiscal balance. At least part of the necessary dollar flow must come from domestic savings; that is, from an external surplus. For this to happen, Argentina will have to live with a rather “high” exchange rate which, according to our calculations, is higher than the current one.
Like other colleagues, I believe it is appropriate to accelerate the pace of devaluation and avoid delays. Certainly, a higher rate of devaluation will slow down the disinflationary process. But there are no magic recipes: it is not possible to correct the lag in the exchange rate and tariffs and, at the same time, lower inflation. The current strategy runs the risk of leading to a sharp rise in the exchange rate, which generates greater inflation, recession and social frustration. It’s not a scenario we want to navigate.
Martin Rapetti is CEO of Equilibra.
Source: Clarin
