Exchange rate volatility could continue

The executive power and the

central bank

(BCRA) announced new measures and clarified others. On the one hand, they set a tighter target for the monetary base in the coming months, while reducing slightly (from 2% to 1.75% per month) the rate of depreciation of the floor and ceiling of the non-intervention zone. exchange (ZNI). In addition, the Treasury has specified the amount of currencies it will sell to meet commitments in pesos from April to December. Some comments:

1. The program with the

MFIs

it provided higher dollar disbursements than foreign currency debt. It has always been known that the Treasury would receive foreign currency that could be used to pay debts in pesos. What has been done now is that this amount will reach $ 9,600 million by the end of the year, which is in the range estimated by the Secretary of Finance a few weeks ago. There is no greater novelty in this respect, let alone a politically motivated change on the part of IMF staff.

2. The increased monetary hardness is trying to influence inflation expectations two months later, with results better than expected. From the way the monetary program is established since its origin, if the exchange rate evolves within the ZNI, the interest rate is endogenous and the monetary policy instrument that the monetary authority establishes is the monetary base. Within the limits of the ZNI, it is a fixed exchange rate system in which the money supply reacts pbadively to changes in demand. The "zero emission" announcement made a few months ago and which has hardened seems now incompatible with the dynamics of inflation, but there was (and remains) a margin of flexibility in the face of inflation. the possibility of changing the composition of the unpaid reserve part of the monetary base) and remunerated (Leliq) that are not included in the target.

3. Whatever the case may be, in the weeks leading up to the new announcements, Leliq's interest rate has increased considerably. But it has not been applied with the same strength on the Badlar rate or on the active rates, which are the factors that are relevant for the decision to dollarize or not the portfolios. Financial entities are the only ones able to buy Leliq and their ability to be dollarized by BCRA regulations is limited. It remains to be seen what Badlar / lending rates are needed to reduce exchange rate volatility, but it can be expected that some costs in terms of economic activity will occur when the process of reducing real rates in January has reversed (or at least delayed). and part of February.

4. With regard to the exchange rate, the design of the program involves "original sin" in a country with low exchange rate volatility. The BCRA has great firepower (it can sell 150 million dollars a day, about 25% of a normal day on the foreign exchange market), but only after the peso has reached the upper limit of the ZNI . (today, less than $ 51 per dollar). It is interesting to note that the IMF's desire not to use its dollars to finance a cheap currency is a problem for a government that thinks that the volatility of the currencies subtracts the votes.

5. As the width of the ZNI has not changed, volatility may persist. Another question is where the weight will be located, closer to the floor or ceiling of ZNI? The problem in answering this question is that it is necessary to estimate how much money the Argentines want to dollarise their peso holdings before going to the elections (we know that they always dollarize and how much the farmers of their harvest will keep in the silo sacks. If we consider that the whole increase in fixed terms in pesos from September to today (measured in constant prices) and half of the maturities of Treasury bills in pesos will be dollarized, we are talking about 10 billion dollars the Treasury will sell its monetary surplus. In this hypothetical exercise, the greatest supply of the crop would be a safeguard. But the magnitude of dollarization will surely be influenced by what candidates with the highest odds of winning in elections should do.

6. In the context of the fireworks that always appear during an election year, it is important to keep in mind that the budgetary objectives set out in the 2019 budget and the monetary objectives have something too active to regain lost trust in 2018. This has costs for the real economy. But to think of less restrictive solutions, it would be necessary to obtain additional financing or to motivate the Argentineans to spend their savings or to lend more to the private sector. The government has already played the third card and the first two do not seem available, at least until next year. At least we know they will not be solved with campaign slogans.

The author is the chief economist of FIEL