At this time everyone is talking about the new jump in the blue dollar, and yet the most innovative thing in the market could be in the official exchange rate. The Government began to send more concrete signals to the market regarding what things it intends to prioritize and what it is willing to sacrifice in order to achieve the stability of the economy. And on Monday the most important thing came from the money table of the Central Bankwhere the devaluation of the peso accelerated notably.
After having closed on Friday -the same day that INDEC announced inflation of 8.4% for April- at a price of $229.20, the Central Bank left run to the official dollar up to $230.70a jump of $1.50 in one day, which triples the rate at which it had been devaluing in recent days.
And it is an eloquent fact, because in the accumulation of measures that had been advanced during the weekend, the exchange issue was the least clear. Unlike what happened with other tools, such as interest rates or import tariffs, in the case of the dollar it was not clear what attitude to take.
The statement that “the BCRA will increase intervention in the foreign exchange market and will manage the pace of crawling peg” was ambiguous enough for everyone to interpret that an announcement was being made faster devaluation or, conversely, a return to the exchange “anchor”.
The issue had been at the center of the economic debate in recent weeks, since many analysts argue that, in an economy like Argentina’s, the slippage of the official exchange rate is, in itself, an inflationary factorsince businessmen look at the dollar to calculate their replacement costs.
Among those who adhere to this position are orthodox economists but also politicians with a strong interventionist imprint. The most energetic and influential on this point is Cristina Kirchner, who in his last public appearance said that one of the factors that accelerate inflation is the requirement that the International Monetary Fund makes for the devaluation rate to evolve in line with the CPI.
“Look how inflation shoots up after the signing of the agreement, when tools are lost. Since then, the devaluation rate has to accompany inflation in a country with a bi-monetary economy, when it is the dollar that generates inflation, And it is something that does not fit the Fund officials and it seems that neither do many Argentines”Cristina shot before her audience of militants in La Plata, while accompanying her words with a graph that showed the acceleration of the CPI from the beginning of 2022.
Cristina Kirchner became the main defender of returning to the exchange rate anchor scheme, against the strategy chosen by Massa
What is striking is that, unlike what happens with other positions of the Kirchner leader -for example, her idea that there is no causal relationship between the fiscal deficit and inflation-, on this point there are several orthodox economists who share that point of sight.
It was noticed in recent days in the debates on social networks, where phrases like this one by Gabriel Caamaño were seen: “In the faculty they are going to teach, as an example of a supine stupidity in the management of Economic Policy, the nominal career that this government and the BCRA decided run back inflation with the interest rate and the official nominal exchange rate while they issued for more than 16 points of GDP in parallel”.
And many remembered that, In the 2018 crisis, the Macrista economic team had raised with the IMF the need to use reserves to stabilize the exchange rate, also based on the bi-monetary quality of the Argentine economy, and under the warning that a sharp devaluation would be quickly neutralized. due to the price contagion effect -o pass throughin financial jargon.
Dollar: another turning point
But the truth is that Sergio Massa He also had powerful reasons for stepping on the accelerator of the “crawling peg”. The first is the need to give a signal that you want to narrow the gap between the official exchange rate and the parallel dollar: This is what it had already done in the last week of April, in response to the currency run that had brought the blue to around $500.
That measure had meant a turning point, given that throughout the year, the trend had been for the official dollar to always be below the CPI. The numbers are eloquent: while the devaluation in the four-month period was 25.5%, inflation was 32%. Put in monthly terms, it had been devaluing at a rate of 6.5%, until Massa decided to accelerate, against the opinion of an important part of the government coalition.
And it was not a minor acceleration: to stop the run in April, the rate of the “crawling peg” at a speed which, if maintained, it would reach 8.4% in a month. However, once the parallel dollar stabilized, once again the Central Bank gave signs of reducing the rate of devaluation, which filled the market with doubts about what the strategy would ultimately be.
This indecision had its reasons: accelerating the devaluation can moderate the risks of a run -since it gives a signal of wanting to reduce the gap and improve the competitiveness of the economy- but, at the same time, it implies the tacit acceptance that it is willing to pay the price of high inflation.
In negotiations for financial assistance, the IMF is pressing for an exchange rate correction
Under the watchful eye of the IMF
In this dilemma, it is clear that one of the main promoters of accelerating the devaluation is the IMF itself. And for Massa it is a key detail, because the decision to grant financial assistance for US$10,000 million that would oxygenate the reserves of the Central Bank may depend on it.
The IMF implied that does not want to repeat the bad experience of 2018during Macri’s administration, when the help of the Fund faded in a few weeks, in the middle of a tussle between the Central Bank and the market. That is why now the organization seems to cling more than ever to one of its guiding principles: financial assistance. can only be used to reinforce reserves but never to defend a certain level of exchange rate.
In the market, the distrust of the Fund is perceived and that is why there is insistent talk that the disbursement of the aid would be tied to the requirement of a prior devaluation.
“There could be some suspicion in Washington regarding the true commitment of the government not to use these funds for other purposes”Look at a report from Mediterranean Foundation.
For its part, an analysis of the investment firm Consultation argues that Massa will have to decide, in “an uncomfortable trade off“whether it will give priority to maintaining productive activity -which implies giving dollars to importers instead of accumulating reserves- or to the stability of the variables.
“The question we ask ourselves is, will the government be able to sustain imports to avoid a further deterioration in activity and a worsening of inflationary dynamics? In any case, it is clear that the limit of this trade-off is set by the government itself exchange scheme”warns the consultant.
The market is attentive to a new escape from the blue dollar, which was interpreted as a reaction to the package of economic measures
Devaluing at 13% per month?
In these first days after the political shock caused by the inflation in April, Massa is giving some signals regarding how to solve his dilemma. To begin with, he is clear that anchoring the dollar is not, at this time, a viable option. Above all, because it would imply a stagnation of the negotiation with the Monetary Fund.
Already in one of its last reports, the IMF had been explicit about its diagnosis of an exchange rate delay in Argentina: “To improve the accumulation of reserves, the devaluation rate should be consistently above inflation“.
And, even more forceful, he had estimated the overvaluation of the peso at up to 25%. Which, in other words, means that for the agency’s technical staff, today the official exchange rate should be around $280.
In the reopening of the market after the announcement of new measures, what became evident was that the “management of the rhythm of the crawling peg“It could be a strong bet. In fact, if the devaluation rate shown on Monday were to continue and be the tonic of the coming weeks, it would be reaching a devaluation rate of 13% per month. Of course, it is just a day and it is early to draw conclusions, but it already implies a whole message to the market.
Perhaps it is the attempt of a “middle path” that Massa seeks to satisfy the demands of the IMF without having to make a sudden devaluation jump. It is true that in the market optimistic opinions do not abound regarding how the experiment turns out, but Massa wanted to send a clear political signal: that in a crisis situation he will not remain passive and resort to controversial measures, even when they may cost him the anger of Kirchnerism.
