A study of the Faculty of Economic Sciences of the UBAhe set out to find out how much the exchange rate for dollarization. The theme of dollarization, which re-emerges by virtue of an economy that navigates the three digits of annual inflation and of a presidential election where it has been incorporated into the campaign debate, was addressed by the RA Center of the FCE (UBA) in a new report.
“To reintroduce the discussion, it is worth first defining what dollarization is about. This implies the full adoption of a foreign currency (in this case, the US dollar) as the only legal tender. To do this, it is necessary to eliminate all Argentine pesos in circulation. This is done by canceling the Argentine Central Bank. In other words, all BCRA positions must be liquidated and its net worth netted. However, to achieve this, both assets and liabilities of the entity must be offset and result in a balance equal to zero. Therefore, it becomes necessary to inquire about the amount and composition of each one,” they point out.
How to arrive at the value of the dollar in the hypothetical context
It is necessary to analyze the preparation of the Balance of the Central Bank, in order to understand how the price that would allow replacing all the pesos in the economy with dollars is obtained. The Central Bank has various assets: international reserves, Non-transferable Bills, public securities, transitory advances and others. Some of these are denominated in hard currency, while others in pesos. The sum reaches 160,412 million dollars (at the official wholesale exchange rate).
On the other hand, following the same methodology, Liabilities reached 144,683 million dollars, so the net worth of the Central Bank is positive for approximately 15,729 million dollars. However, towards the interior of its balance are Some peculiarities of Argentine accounting that could tarnish the final result.
“First of all, the declared international reserves correspond to what are considered gross reserves. These are made up of multiple items: the BCRA’s own dollars, gold, bank reserves (deposits in dollars from the private sector), and financing lines such as the swap with China (18,891 million) or the BIS (3,189 million), among others Therefore, discounting what is not the entity’s own money and the items that, if used will mean to some extent an indebtednessresults in the net reserves held by the BCRA being significantly lower: approximately 439 million dollars at the time of the report.
Second, another item that makes up the assets of the Central Bank are the Non-transferable Letters. These are debt titles that the National Treasury has with the BCRA for all the dollar reserves that it has taken over time from the coffers of the monetary authority. However, due to its conception, it is a non-transferable debt, so it is not listed on the market. In line with this, article 62 of the law of social solidarity and productive reactivation, sanctioned on December 21, 2019 establishes that these debt securities must be calculated at technical value. Given that currently the debt securities in dollars of the National Treasury trade at parities of an average of 25%, the effective value of the Non-transferable Bills is far from being what it would be if they were listed on the secondary market.
The UBA issued a report on how much the dollar should be worth
Having clarified these issues, distinguishing what is liquid (bills, bonds, etc.) from what is not (Non-transferable Bills) and how to calculate these items, it is appropriate to delve into what would be the implicit exchange rate that results from netting assets (in dollars) and liabilities (in pesos) of the BCRA.
Thus, four analysis scenarios are proposed. The first considers the current situation, based on the stocks of international reserves and foreign currency bonds held by the Central Bank vs. the total of its liabilities in pesos.
Then, two scenarios are detailed in which it is contemplated how much the dollarization exchange rate would be in the event that net reserves are at levels similar to those at the end of 2022, and another that does the same in the event that public securities are listed at a lower parity (20%) similar to values at the end of 2022 as a result of an excess supply due to the need to liquidate positions to obtain dollars. Finally, a mixed scenario is proposed that integrates both variants of scenarios 2 and 3.
Based on the exposed table, in the current baseline scenario, the dollarization exchange rate would reach $892 considering (net reserves and public securities listed on the market), while it would be $894 for the mixed scenario.
Otherwise it would be necessary to request a loan for 25,000 million dollars to dollarize at a price similar to the CCL, which at the time of the report was in 430 pesos.
As a conclusion, it is mentioned that dollarization per se brings associated price stability (inflation is suppressed and it even gives rise to deflation scenarios), but for it to function well as an economic system it is a necessary condition to carry out a series of structural reforms (sustainable over time) which, if carried out, would lay the foundations for a new economic configuration, which would raise the question of whether it was indeed necessary to dollarize.
