Curbing the dollar and developing consumption, the government's new challenge – 20/04/2019

Just hours apart, the BCRA and the government announced measures in two opposite directions.

The BCRA has decided to freeze the limits of the no-intervention zone until the end of the year and at the same time eliminate the possibility of buying dollars (against pesos ) in case the dollar perforates the soil of the zone.

With this decision, the monetary authority asked act on expectations, reinforcing the expected contraction bias and commitment of "doing all that is possible" to avoid a new exchange event, as opposed to a combination of country risk and inflation that puts pressure on the dollar balance / short-term rate, nowadays dampened by the high seasonality in the liquidation of the harvest and the beginning of Treasury auctions.

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It should be recalled that since mid-February, the monetary program, which aimed at strengthening credibility, has moved from initial objectives to priority. It is a priority to try to minimize the probability of a new exchange, the rate being actually endogenous. This exchange rate goal.

The decision not to adjust the top bracket can be read as a benchmark seeking to act on inflation / devaluation expectations and long rates, although the BCRA's limited ability to defend the cap in the event of a swap requires that, to be effective, the signal is perceived as credible by the market. In other words, the agents believe that the BCRA will maintain its implicit commitment to continue the adjustment of monetary policy in the event of foreign exchange market tensions and therefore will not test the upper limit. For its part, the decision not to broaden the monetary base in the event that the demand for money is accompanied would imply a strengthening of the contractionary bias. throw the last silver bullet to soften the hardness of monetary policy and the "shock", in an economy with high inflationary inertia, with a policy of income that badociates these months the impact of parity, the increase of pensions and social programs and the revival of Argenta credit.

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On the contrary, the measures announced Wednesday suggest trying to give a little air to the consumer and business and, in fact, they "compete" with BCRA's ads. The lack of scope and ambition of the measures reflects the magnitude of the budget constraint that affects the economy at these levels of sovereign risk premium.

Some of the measures are correct even for more benign scenarios, such as those aimed at discouraging commercial or monopolistic disloyalty practices and those that reduce financial costs for businesses. However, at the global level, they incorporate long-criticized decisions, in which the economic policy that has to apply them does not seem to believe and which, in many cases, are not viable in the event of a deterioration of the macroeconomic situation. Even if they manage to lighten things up somewhat in the short term, they risk tightening restrictions in the long run.

In pledging not to proceed with further tariff increases, the government seems to have ruled out a solution that seemed plausible in the event that the decline in real terms of collection would complicate budgetary objectives (as highlighted by the IMF in the third revision of the agreement), At the time, it was not clear exactly what would happen in the event that a more accelerated exchange rate dynamics would significantly increase production costs. electricity and the price of gas, which are largely dollarized. Even if the promise is kept, it would be the next government that should adjust the rates not only for the 2020 costs, but also for the 2019 costs.

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The extension of the solidarity price program does not constitute a brake on inflation, although it can act, if supply is guaranteed, as a reference price for basic basket products in an economy where volatility and nominal dispersion weaken. the informative content of the awards. Here again, the continuity of the program does not seem viable in the event of an acceleration of inflation, which leaves the starting prices very "behind".

Finally, discounts on card purchases are welcomed by ANSES beneficiaries, although Argentine credits do not seem to be the most desirable mechanism to mitigate the fall in income of the most vulnerable sectors. In this case, there is a risk of temporary debt relief for several years for up to 30% of the monthly salary in the payments of the coming months, which would still affect more this segment.

In the end, the current situation is a reflection of the balance of payments crisis that exploded last year, when the market slipped to finance a record current account deficit in 2017, which had doubled over in the previous year. already at that time, while the country risk was only 350 points, we warned that it was the Achilles heel of the model. Although the inheritance was very complex, Failures of diagnosis and coordination implicitly in the trilemma of a "politics" determined to constitute an electoral capital for a government in minority power, the decision to gradually reduce the budget deficit while lowering taxes and transfers of resources to the provinces and setting targets for Very aggressive inflation and unintegrated relative price correction eventually increased the costs of correcting some imbalances and amplifying others.

Given the instability of money demand, the strong transfer on the prices of the devaluation, the strong participation of the public debt in dollars and our export structure, the adjustments of the balance of Payments become more traumatic in terms of lowering real wages and credit, as they endogenously result in pro-cyclical monetary and fiscal adjustment. Very different from neighboring economies that managed to reduce the external deficit with a reduction in costs in terms of real GDP decline (Colombia 2015/2017, Peru 2015/2017, Chile 2013/2014).

For the ratio of public debt in the market and international organizations to PBI to be around 50%, the economy must move towards a budget surplus before interest and avoid a new shock of real exchange rate: with a real rate of 5% and a growth of 3%, the primary fiscal surplus needed to keep the ratio of public debt to GDP constant is 1% of GDP. But if the real rate required to keep the real exchange rate stable is 8% and the potential growth is 1.5%, then the required primary fiscal surplus is 3.3% of GDP, with which the required fiscal adjustment is higher. and therefore, dollar pressure and country risk would be reinvested. In other words, with 50% of the public debt to markets / organizations and 3% interest in PBI, the average cost of public debt in dollars is around 6%, which makes urgent the convergence towards a scenario economic growth and surplus. primary tax Nothing easy with this level of country risk and political noise.

That's why it will be the key building a political consensus beyond the government in place This will lay the foundation for macroeconomic stability in terms of convergence to the primary fiscal surplus, monetary control with a credible nominal anchor, and a structural reform agenda to improve systemic competitiveness.

The authors are the directors of Eco Go and the professors of the Master in Finance from the UTDT.