In the work Waiting for Godotwritten by Samuel Beckett, we meet Vladimir and Estragon, two characters trapped in the endless wait for a certain Godot. From the beginning of the plot, the characters go through the same routine day after day, expecting Godot to appear. However, that moment never comes.
Something similar could be said to be happening in Argentina with the long-awaited lifting of the currency controls (the various exchange regulations that exist for the acquisition of dollars, both for savings, remittance of profits, exports and imports).
Shortly after taking office, Milei said that he would remove them by the middle of this year, when he finished cleaning up the Central Bank’s balance sheet (eliminating remunerated liabilities and accumulating sufficient reserves). After that date, and without having removed them, at the beginning of July when he was asked about this same issue on the X network, answered that, in addition to the elimination of remunerated liabilities (and puts), inflation should converge with the rate of variation of the official exchange rate.
To make matters worse, just a few days ago, the president gave a speech at the annual conference of the Council of the Americas, where he not only changed the conditions necessary for his exit, but also maintained that “it is false that growth cannot occur without restrictions,” implying that he could sustain himself for –much– longer.
Regarding the conditions, he said that the lifting of the currency controls “will occur when the monetary base ends up equaling the broad monetary base; which means that all the surplus money has been eliminated. If there are no surplus pesos, I can clearly open it, because it is like giving them a revolver without bullets; no matter how much they want to shoot, they cannot because they will not have bullets.”
Note that, faithful to his monetarist manual, Milei is convinced that it is enough to simply eliminate the surplus of pesos so that the exchange rate gap between the financial dollar and the official dollar is reduced gradually until it finally disappears. At that point, the elimination of exchange regulations would take place, giving rise to the unification of exchange rates.
The problem with this reasoning is that it denies the importance of dollars, in particular, the need for the Central Bank to have sufficient reserves. Despite having accumulated a good amount of foreign currency in recent months, the level of the BCRA’s reserves measured in net terms (that is, discounting the financial obligations it faces in the short term) remains in negative territory, around USD -3.8 billion.
And this is where the first problem appears. As can be seen in the attached graph, the acquisition of foreign currency by the monetary authority stopped abruptly in June, after averaging a monthly purchase of USD 2.7 billion since the start of the new administration. Such a sudden halt can only be explained by financial reasons. As we showed in a previous note, this occurred in the context of the sustained increase in the exchange rate gap, which reflected doubts regarding the sustainability of the economic program and an increase in devaluation expectations.
The second problem is the outlook for the coming months. First, because due to seasonal issues, during the second half of the year the BCRA tends to adopt a selling position in the foreign exchange market (the liquidation of dollars from the soybean harvest occurs mainly during the first half of the year), which would further aggravate the reserve situation. Here we have to see what happens with the money laundering that has just been launched in the last few days. If a significant inflow of foreign currency is observed through this channel, it could partially or totally offset this drop in reserves.
Aside from that, in the coming months the country faces debt maturities in foreign currency for some USD 5.5 billion (the most critical moment will be in January, when payments of capital and interest on private debt are concentrated, for some USD 4.1 billion). Therefore, it is almost certain that the BCRA reserves will continue to fall in the immediate future, which will put Milei at a crossroads.
If he decides to remove the regulations anyway, his thesis that by removing all the surplus pesos, the market will not have “bullets” to generate a currency run will be put to the test. If he is wrong, the scenario would be extremely worrying. Let us remember that the elimination of the regulations implies that both individuals and companies can access the purchase of dollars. This entails an increase in the demand for foreign currency that could potentially be very high. As a reference, only in the first three months of the unification carried out by Macri in 2015, the net purchase of foreign currency for hoarding was USD 4.7 billion. Without sufficient reserves and without external financing (in the case of Macri’s government, almost at the same time that the unification was carried out, more than USD 5,000 of financing came in), if there were a similar increase in demand, this would undoubtedly generate a currency run that could even cause the BCRA to lose control of the exchange rate, unleashing an inflationary spiral.
If, instead, it decides to continue postponing the elimination of foreign exchange regulations, that will surely maintain exchange rate stability for some time, but, on the other hand, it will eliminate the possibility of foreign investment or the necessary financing, putting the Government in a similar situation again.
Which brings us back to Waiting for GodotThe work, in its apparent simplicity, confronts us with a harsh but inevitable reality: sometimes, what we expect never comes, and we are left with only the choice of how we face that endless wait.
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