Dollar: the risks of the electoral strategy – 31/03/2019

By Marina Dal Poggetto, director of Eco Go

The latest report from the Eco Go consulting firm led by Marina Dal Poggetto has been distributed to its clients under the title: "2019 … the year we" live "in danger."

The introduction becomes relevant from what was experienced in the week with the dollar and the climate of uncertainty who surrounded the business world.

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The point developed by the report is that of the the validity of the "swap band" which for many economists is an element of concern rather than relief. The key points in the report on "The risks of the electoral strategy" define a possible framework for the next economy. The main concepts of technical report and lack of precision are as follows: Stability was ensured in January and early February when (after the December shock, when country risk reached 840 basis points), aggressive price recovery has coexisted. local financial badets with a central bank that buys dollars in the correct intervention zone in parallel with a rapid reduction in the LELIQ interest rate (from 60% to 45%).

Monetary compression

As soon as the dollar begins to float in a very wide band (30% of the floor) and against a movement of 4% in one day (9% of the minimum), the reaction of the political scale. The BCRA announces an even greater monetary tightening and brings again the LELIQ interest rate to 67%. At the same time, the Minister of Finance turns to the IMF to sell the necessary dollars at the end of the year, even at the cost of jeopardizing the refinancing of the LETES.

Look also

The objective is that the display of the currency supply, intervention in BCRA futures and higher interest rates are a bridge to the harvest. The problem is that the reaction of pbadive rates (those of fixed terms) to the signal of monetary policy is slow, which is why the BCRA begins to look for mechanisms to accelerate this transfer. But also the reaction of agricultural dollars to the dollar / rate ratio is the same as that of the rest of the sectors and there is no rate of interest that can be achieved if devaluation expectations skyrocket.

In this context, the attempt to reduce the risk of liquidation, by providing dollars to limit "inflationary pressures" during the pre-election period, could accelerate questions about debt repayment capacity in a context. inflation and indexation of retirement expenses makes it difficult to achieve the budget goal.

LETTERS and election

And when, in addition, the financial program badumes that 46% of LETES are refinanced by 2020, by which date the maturity date of this 4.5% instrument is currently exceeded. two days before the first ballotwhile instruments that expire in 2020 yield 13%.

Look also

It is that the double zero fiscal and monetary announced in October under the second agreement with the IMF was very contractual. Faced with this, the government's strategy to move the election year was to moderate the trajectory of the dollar so that wages, pensions and social schemes would recover in the face of inflation still affected by rate hikes .

In fact, exchange rate stability in January / February led them to visualize "green shoots" in front of phenomenal fourth quarter adjustment (GDP fell by 6.2%, consumption and investment dropped by 11% and 25% respectively and unemployment reached 9.2%, with 11.5% in the GBA). The green shoots are now starting to tarnish in the face of the BCRA's overreaction, whose short-term goal is to stop the dollar with a more aggressive monetary program. Program which, in a context of high inflation, tends to be even more contractual in real terms. And this without taking into account the implicit inconsistency in accounting for the LELIQ if this rate is perpetuated over time.

Proof of a slower deceleration of inflation (about 11% of the first quarter including the 4% reflecting our March Retail Price Survey) and poor business data in developed countries lead to diminishing tailwind performance that has resulted in patience "of the system. Federal Reserve. In addition to this, last week the deterioration of the "governability agreements aimed at getting congressional reforms adopted" in Brazil, as opposed to the progress of Justice over former President Temer and the current governor of Rio de Janeiro .

The Treasury's 10-year treasury rate of 2.43% (almost a point less than it reported at the beginning of this story a year ago) is not enough to offset the growing electoral risk inherent in the government's polarization strategy adopted by the former. President, even though the macroeconomic imbalances were limited.

Stability of the exchange

Paradoxically to win the elections, the government must create panic in the event of a possible victory for Cristina Kirchner, but also needs exchange stability. And with this monetary / exchange system can not insure, because it is the probability that "panic" will become reality (even if it is today low considering the ceiling of 39%). former president) that generates financial instability and trade in a context as we have already explained, the dollar is the only tool available to mitigate the recession and inflation in the face of elections.

Look also

Although for the sake of caution, we still maintained our stable baseline for this year, the risk of an unstable scenario mentioned in a previous report entitled "Inter-band projection" (compatible with the upper end of the exchange rate mechanism) is beginning to take shape as a counterpart of short-term decisions aimed at achieving complex objectives.

But unlike the previous government's rudeness that had involved the sale of dollar futures contracts in 2015 to reach the elections without exchange rate shocks, this attempt could now implode within the leadership, with the free movement of capital.

An option at the center that takes strength, or a possible decision by Cristina Kirchner not to appear, could help a more orderly transition but, simultaneously, Either or both of these alternatives dynamite the government's political strategy to be reelected. Due to the closure of the lists on June 22, there is still nearly three months before this mystery disappears.