More dollars without turning off the "empty" pesos

Although expected, the 3.8% rise in the consumer price index in February was bad news that forced Mauricio Macri's government and the
the staff of the Monetary Fund to rethink the management of certain instruments provided for in the last agreement
to be listening, to adapt them to the preventive behaviors described in this year of electoral uncertainty.

Last month's high inflation, which resulted in a 51.3% year-on-year increase, was mainly due to the overlapping of tariff increases (electricity, buses, trains, metros) and regulated prices (prepaid, social carafe). , plus gasoline and diesel. But also to increases in consumer products, which continue to gradually shift the impact of the sharp devaluation of 2018. Evidence is that "fundamental" inflation (with no regulated or seasonal prices) was slightly higher than the first two months of the year (7%) at the general level (6.8%) and the same in the last 12 months (52.5%, although less than 54.5% at regulated prices). In the first case, the price of beef has increased considerably, which has resulted in substitutes. However, depending on the weight of INDEC's consumption basket, in Greater Buenos Aires, the sum of housing, water, electricity, gas and other fuels (10.5%), transport ( 11.6%) and communications (2.8%) were higher in weight (24.9%) than food and non-alcoholic beverages (23.4%). In addition, restaurants and hotels (10.8%) and health (8%) are located.

The 100% rise of the dollar last year was not a "turbulence", but an intense exchange shock, whose effects are still felt.

Another example of a button is that in the middle of March, the purchase ticket of the fixed basket of 30 products that this column collects in the same branch of Buenos Aires from a supermarket chain is $ 4572. This amount implies increases of 12.2% over December ($ 4,072) and 58.5% over a year ago ($ 2,883). Because Argentina exports what it eats, the largest increases are in French bread (100%), meats (58% to 78%), stew noodles (84%), cooked ham ( 81%) and cheeses 40% to 180%). Other products also outperform accumulated inflation, such as creamy detergents (94%), fabric softeners (93%), yerba mate (90%), ground coffee (62%) or the like. 39, mineral water (54%).

Some international brands of toiletries have equivalent dollar prices similar to those in other countries. However, to sell them in pesos, they usually use periodic auctions for quantity – not always successfully – in the face of contraction in consumption. This contradiction between rising prices and declining sales is the difference with what happened almost in 2018, when the transfer to devaluation prices and its impact on costs were more attentive to the preservation of volumes sold. The rebound of 6.5% (to 39.7 USD) recorded by the dollar in mid-February, after the BCRA lowered the Leliq rate from 55% to 43% a year, probably influenced many preventive measures . Then, it had to rise, in March, up to 63% when the dollar came to touch the $ 43.

Added to this are inflation expectations of around 3% per month for March (when there will be further increases in the electricity, transport, fuel, toll, cigarette, mobile telephony, private schools) and in April (with an increase of 30/35%). in natural gas). In the latter case, it is still unclear how Indec will calculate in the IPC the announced "flat rate" billing of residential rates, which aims to reduce payments during the winter months in order to redistribute them between payments summer.

Given this track record and the upcoming electoral uncertainty, which, sooner or later, would increase the demand for dollars in a bi-and large-indexed economy, the government has chosen to prematurely strengthen the supply to reduce volatility. nominal exchange market.

The announcement made by Minister Nicolás Dujovne in Washington, of an amount of $ 60 million per day until the end of the year, of a total of 9 600 million US dollars as of April, was the product of a political decision of the IMF. Only a few days ago, the technicians of the agency did not accept that a large part of their disbursements were put on the market in exchange for the pesos necessary to the Treasury to pay their payments (wages , suppliers, interest receivables) so as not to encourage the hoarding of speculative dollars, which they paradoxically left to the Treasury (partly for a higher percentage of renewal maturities than estimates), although it lacks the pesos that the Bank Central has ceased issuing since mid-2018 to finance its financing.

In return, the Fund imposed the two short-term conditions announced Thursday by BCRA Manager Guido Sandleris: extend until zero of the monetary base (maintaining the current 10% compliance and canceling the seasonal adjustments for June and December) and reducing the daily floor and ceiling adjustment of the non-intervention area to 1.75% daily (ZNI), which was 2% in the first quarter and started with 3% in October.

The first measure is further tightening monetary policy. The BCRA will maintain the "empty" pesos in Leliq's daily offers to banks to regulate liquidity, change reserve requirements and reduce oxygen to inflation. With high real interest rates and the rising cost of credit, he is trying to get the holders of dollars to buy pesos. The second, in turn, aims to maintain the floating of the dollar in the broad band of mobile exchange (30% between floor and ceiling), but with a monthly adjustment lower than expected inflation for the second quarter, thus reducing the money market pressures. the prices

On paper, this combination – as well as the Daily Treasury auction procedure – suggests that the dollar will be transferred close to the floor of the ZNI (which, at the end of March, would be 39.38 USD, with a ceiling of 50.97 USD). ), after having exceeded by almost 12% a few days ago. If it is drilled, the BCRA can buy reserves and issue pesos in exchange for not increasing the monetary base. This higher foreign exchange supply scenario could result in the liquidation of the dollar dollar crop if prices fall. Friday, the market reaction was clearly bearish. However, before April, some technical problems with this system should be solved: as announced, it may happen that the BCRA buys dollars under the floor while the Treasury simultaneously makes sales on the market, which reach 160 wheels.

For the moment, the government – with the eye of the IMF – is banking on the predictability of the currency to avoid shocks before the elections. But as the path chosen to reduce inflation is the longest, since the monetary hardness does not neutralize the effects of tariffs on the reduction of subsidies, overcomes the specter of the monetary deficit in the months to come. In fact, the current multilateral real exchange rate – an amount of withholding taxes – is 18% higher than the 17% recorded in December 2015, when stocks had stopped and the market had been released, after peaking by 41% at the end of September 2018. In addition, as long as inflation will not fall to 2% per month in May or June, the BCRA will not have too much room to maneuver to reduce the rates of inflation. Interest, even if it does not allow to reactivate the economy.

The third requirement of the Fund, which is to send to Congress a bill reforming the BCRA charter, which prohibits by law to finance the Treasury, is unlikely to be approved during the election campaign. And, to complete the picture, the organization's outdated reluctance to allow programmed foreign exchange sales to cover market demand raises a particular problem: it is the dollars that could be missing by 2020 if Argentina does not fails to reduce country risk and renew the market. debt maturities on foreign markets.

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