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Breaking the dollar and expanding consumption, a new government challenge – 04/20/2019

A few hours apart, BCRA and the government announced measures in two opposing directions.

BCRA decided to freeze the boundaries of the non-intervention zone by the end of the year and at the same time exclude the possibility of buying a dollar (against pesos) in case the dollar would perforate the floor.

By this decision he sought a monetary authority expectationstrengthening the expected contraction bias and determination, reading between the lines, "doing everything possible" to avoid a new exchange meeting, as opposed to a combination of country risk and inflation, putting pressure on the dollar / short-term rate, dampened by high seasonality in harvesting and the Treasury auctions.

It is worth remembering that since mid-February the monetary program has changed from a system of overcoming the original credibility targets to a system where efforts to minimize the likelihood of a new exchange event that is actually endogenous is a priority. This exchange rate target.

The decision not to adjust the upper band may be seen as a reference that seeks to work on expectations of inflation / devaluation and long rates, although BCRA's limited ability to prevent a cap in the event of an exchange requires efficiency, the signal is perceived as trustworthy by the marketThis means that the agency estimates that BCRA will continue to maintain its implicit commitment to continue adjusting monetary policy in the event of tensions in the foreign exchange market and therefore does not go to the upper limit. The decision not to expand the monetary base if the demand for money accompanies itself means strengthening contraction bias, throw away the last silver bullet to alleviate the stiffness of monetary policy and "shock", in an economy with high inflationary inertia, with an income policy that in these months combines the impact of parity, increases in pensions and social programs, and an increase in Argenta's credit.

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Conversely, the measures announced on Wednesday point to efforts to provide consumption and society and in fact "competing" with BCRA notifications. The lack of scope and ambition of these measures reflects the scope of the budgetary constraint affecting the economy at these levels of risk risk.

Some measurements are correct even for more favorable scenarios, such as those aimed at discouraging commercial or monopoly practices of disloyalty and those that reduce the financial costs of businesses. On a global level, however, they include decisions that have been criticized for a long time, in which the economic policy that must implement them does not seem to believe and, in many cases, is not sustainable in the event of a deterioration of the macroeconomic situation. Even if they manage to provide some relief in the short term, they risk being limited.

The government appears to have undertaken not to make further increases in tariffs, and it seems to have eliminated a remedy that would be likely if the decline in real collection values ​​would complicate fiscal targets (as the IMF pointed out in the third revision of the agreement) ), it was not clear what would happen if the accelerated exchange rate dynamics would significantly increase electricity production costs and gas prices, which are largely dollarized. Even if this promise was fulfilled, the next government, which should adjust the rates not only for costs up to 2020, but also for 2019.

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The Caring Prices extension does not act as a brake on inflation, although it can work if supply is provided, as a price reference in basic basket products for the economy, where nominal volatility and dispersion have weakened the informative content of prices. Again, the continuity of the program does not seem to be sustainable in the case of accelerating inflation, which leaves the starting prices very "backward".

Finally ANSES recipients are welcome to take advantage of card shopping discounts although Argentine loans do not seem to be the most sought-after mechanism to mitigate the decline in incomes of the most vulnerable sectors. In this case, there is a risk of temporary relief against debt for several years at an amount that can reach up to 30% of the monthly pay in installments over the coming months, which will hit this segment even more.

The current situation is ultimately a reflection of the balance of payments crisis, which was launched last year when the market reduced its share of financing the current account deficit in 2017, which doubled compared to the previous year. Already at that time, when the country's risk was only 350 points, we warned that it was the Achilles heel of the model. Although the heritage was very complicated, Diagnostic and coordination disorders in a policy aimed at building a voting capital for a government that started in a minority, the decision to gradually reduce fiscal deficits in tax cuts and the transfer of resources to provinces and very aggressive inflation targets that did not include the correction of relative prices resulted in increased repair costs in some imbalances and raising others.

Given the instability in demand for money, the high transfer of devaluation prices, the high level of public debt participation in dollars and our export structure, balance of payments adjustments are becoming traumatic in terms of real wage and credit decline as they endogenously pull pro-cyclical monetary and fiscal adjustment. Very different from neighboring economies, which managed to close the external deficit with lower costs in terms of real GDP decline (Colombia 2015/2017, Peru 2015/2017, Chile 2013/2014).

For the public debt-to-market and international organizations' ratio to PBI, which is to hold around 50%, the economy must move towards a fiscal surplus before interest and avoid a new real exchange rate shock: a real 5% rate and a 3% growth, primary fiscal the surplus needed to maintain the public debt to constant GDP ratio is 1% of GDP. However, if the real rate needed to maintain a stable real exchange rate of 8% and potential growth of 1.5%, the necessary primary fiscal surplus is 3.3% of GDP, with which the required fiscal adjustment is greater and therefore the pressure on the dollar risk would be and the reverse country. In other words, with 50% of public debt on the market / organisms and 3% of PBI's interest, the average cost of public debt in dollars is close to 6%, making convergence towards a scenario with economic growth and a surplus of urgency. Fiscal With this level of country risk and political noise there is nothing simple.

That's why it will be crucial building political consensus outside the government which will lay the foundations for macroeconomic stability in terms of convergence to primary fiscal surplus, monetary control with some credible nominal anchor and a structural reform program that will improve systemic competitiveness.

The authors are directors of Eco Go and professors of UTDT Master of Finance

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