Inflation versus exchange rate, who is winning the battle of the century?

The country is going through a serious economic crisis resulting from a state policy of recurring public deficits. From 2011, the country ran a budget deficit, although the debacle occurred from 2015. Based on an expenditure of $ 100, we show these numbers for your better understanding:

We see that the policy of spending more than what is paid has been constant since 2015, the adjustment of the government of Mauricio macri The year 2019 marked a positive change in the trend of the permanent deficit. However, the elections were lost and in 2020 the pandemic exacerbated the problem.

In matters of interest, the government of Cristina Fernández de Kirchner In 2015, he paid very little interest, but it is nonetheless true that part of the debt was in default. Macri, in 2019, paid an exorbitant amount of interest, which could not continue to be paid in the future, it was 2.9% of GDP and its payment was unsustainable, Argentina was heading for a restructuring of public debt.

In 2020, there are three events that the government has had and will have to overcome.

1. In the first place, a health crisis that leaves the State with a very low level of income given the expenses it has to face.
2. Secondly, must restructure private debt and with international financial organizations, since Argentina is short of financing and cannot renew its debt maturities.
3. In third place, To finance the budget deficit, it resorts to financing from the Central Bank via the issuance of pesos.

All this correlates with a deepening of dollar values ​​that Macri imposed at the end of his government, a sharp rise in inflation in the last months of 2020 which continues in the first months of 2021, and the government decides to rely on the free exchange rate (dollar stock) to generate favorable expectations in the economy.

With the dollar’s super stocks, the more official dollar being trampled on, it doesn’t look like official dollar-linked investment instruments are a very good deal.

The lack of visibility of an agreement with the IMF and the Paris Club makes the market discounting the possibility of a new default, or a postponement of payments that will lower the rating of Argentine bonds. This has caused our sovereign bond prices to fall below 40% and country risk will climb to levels of 1647 points.

With this scenario, financial assets such as stocks, they cannot have a positive scenario in front of them. The Merval index is struggling to break above the $ 350 level or the 50,000 point comparison.

The market falls in love with the possibility that it spends soybean, wheat and corn prices generate more dollars for the country, but here too many analysts are optimistic. The discounts that work on international prices are very high. Soybeans in Chicago are worth u $ s530, but in Argentina it is listed at u $ s330 officials, if we want to take this dollar bill value, we have to multiply the price u $ s330 for $ 90.65 who gives us $ 29,915, and from there transfer it to a dollar stock market listed on $ 145.39, this gives us the sum of u $ s206. The producer looks at these numbers and sees a tape of the 61% This generates indignation and postpones the sale of soybeans to maximum expression. So you don’t get bored with the numbers, Chicago corn is worth u $ s220, and in Argentina, it is left to the producer in u $ s122 invoices, which implies a reduction of 45%.

As if all this weren’t enough, it is very likely that the drought of the past 45 days will lower crop estimates for this year. Until now they were estimated 49 million tonnes of soybeans and 48.5 million tonnes of corn, they should fall by 5.0%. Between the effect of the drought and the retention of cereals, the government could exacerbate its problems of financing and income in dollars for the country. On the other hand, international markets would show that the prices of soybeans, corn and wheat would have reached a ceiling, which could be temporary, but finally capped.

In an economic context with shortage of product supply, as we have not invested in the food sector for years and we are losing cattle herds, we are not increasing in the herds of breeding mothers of pigs and we have fewer dairy farms, it is very possible that the The supply of products decreases, and in the face of a constant demand scenario, prices arbitrate upwards without the possibility of control by a bureaucrat who seeks to discipline the rules of supply and demand of a market.

Between the impact of increasing emissions, lack of investment and shortage of supply, inflation will say present and, in this situation, peso bonds that adjust to inflation, like UVA fixed-term (inflation-adjusted) will become assets chosen by the market. .

The government limits the rise of the official dollar and burns bonds to keep the dollar at bay, stock market which serves as an anchor for the blue dollar. In this context, he could not indefinitely maintain this policy of withdrawing the official dollar from the shirt so that it did not go up, nor could he sell unlimited bonds so that the stock dollar did not rise. As exports are not moving at the desired pace, the government puts a barrier to the entry of foreign products, which affects economic activity.

conclusion

• It is not a good sign to have a very high budget deficit, let alone if it is funded by monetary problem.

• Anchor the official exchange rate and suppress the rise of the dollar stock market selling bonds that earn 18% a year is buying time until the country is credible or the market places the dollar at much higher levels than it currently is.

• As long as the government buys time and the dollar stays calm, inflation will be very high and those who invest in securities or fixed terms that adjust to inflation will be the winners.

• In this context of financial repression, bonds and equities will not be favored. Banks are the big losers in this system, as they show very low profitability balance sheets, and this would pose problems of capitalization in the near future.

• Elections are in October, forever. The OECD forecasts for Argentina a decrease of 10.5% of the GDP for 2020, a recovery of 4.6% for 2021 and 2.1% for 2022. This implies that by 2022, Argentina would be of 4.4% below the year 2019. Brazil would post a decrease of 4.4% for the year 2020, that is to say a recovery of 3.7% for the year 2021 and 2.7% for the year 2022. This means that Brazil in 2022 would be 1.8% above the level of GDP in 2019. Advantage for the country of Rio de Janeiro, not counted for Argentina, we are out of the copa.

• Short term inflation beats the dollarIn the long run the dollar will beat inflation, place your bets. Invest in stocks and bonds, abstain for now. Those of us who lose insurance are the citizens who live in the country, where every day our assets are worth less.