Federico Furiase and Martín Vauthier
Directors of Eco Go and Professors at UTDT
Not “shorting” (betting against) the BCRA with stocks in electoral year. In the note that we wrote for this newspaper at the beginning of December, we pointed out that in electoral year and with stocks, the Government was not going to validate a discrete jump in the official exchange rate as part of a negotiation with the Fund and that it had the margin to maintain a slippage in the official exchange rate well below what the ROFEX futures contracts set. And so it was: ROFEX futures contracts expiring in March 2021 fell from $ 100 in early December to the $ 95 zone today.
A month and a half later we ratify the diagnosis. In an electoral year, with growing stocks and social demands, the Government will sooner or later use the official dollar and tariffs as semi-anchors to try to recover wages against inflation. It is not a prescription, but a diagnosis … Does the Government have room to get to October without “devaluing”? With stocks, soybeans at US $ 500 per ton, political capital and a BCRA that has 15,000 million nominal in sovereign bonds in liquid dollars, but that yield 17% in the market, to sell against pesos, macroeconomic imbalances may last longer time without imploding from what the Excellency of economists predicts, even at the cost of continuing to deepen the currency exchange imbalance, deteriorating the BCRA balance sheet and hiding inflation under the rug.
But of course, after the October elections there are two years left, there is little gasoline in the net reserves of the BCRA, there is no international capital market to place debt at low rates and the spaces to increase the demand for pesos were practically saturated in 2020 with a record monetary financing of $ 2 trillion (7.5% of GDP).
It will depend on how the economy reaches the elections and the electoral result, if whether or not we will have the nominal shock that the market has been waiting for with the updated clock of the BCRA’s net liquid reserves.
Fiscal inertia for 2021. As we have been pointing out, the 2020 primary fiscal deficit closed at 6.5% of GDP vs. 8.3% of the GDP of the Budget. The paradox is that, despite said adjustment of the fiscal numbers in relation to the Budget, the Government did not even try to capitalize it as a kick to begin to build a story that contributes to a recovery in the price of bonds, in a world where Peru places 100-year debt at 3.3%, Mexico at 50 years at 3.75% and the Dominican Republic at 20 years at 5.3%: the nature of the policy, the lack of a program to begin to rebuild the balance of the BCRA and the technical position of the market they play against.
Looking ahead to 2021, starting from a primary deficit of 6.5% of GDP and assuming a nominality greater than that of 2020, around 45%, which would help to liquefy pension spending (60% of current spending net of COVID spending ) given the indexing formula approved in Congress, a drop in COVID spending from 3.4% of GDP to 1.5% of GDP, the maintenance of subsidies as a percentage of GDP at 2.9% (something that could be achieved even in a scenario where tariffs rise below costs, given the higher chargeability in energy and the rise in the load factor in transport), and a recovery in the collection / GDP ratio driven by the rebound in the level of activity, fiscal inertia would bring us in 2021, even without great effort, closer to a primary fiscal deficit of 3.5% / 3.8% of GDP than of 4.2% of GDP of the Budget.
But obviously, in an election year, with a politically worn government, growing social demands with real wages coming from underground, and a second wave of COVID that looks very likely in light of what is happening in the Northern Hemisphere and the resurgence of In recent weeks, the policy could perfectly fill the pool and bring the pachín to the primary deficit of 4.2% of GDP, which would imply pulling too hard on the monetary financing rope, demanding an exhausted demand for pesos and risking the exchange gap and inflation in the electoral year. The twists and turns around the extension of the tariff freeze and the noise surrounding the negotiations with the IMF are one example, where the signal that was sent doesn’t help either with the aggressive restructuring offers in the case of the provinces and YPF.
Agreement with the Fund in “Stand By”? Minister Guzmán has a great challenge ahead of him: abide by the political restrictions of the electoral year and negotiate an agreement with the Fund that not only allows the maturity profile to be stretched with the body but also sell a history of fiscal consolidation and monetary adjustment to the market, to lower the exchange rate gap and rebuild the supply of commercial dollars during the heavy harvest, a necessary condition for the BCRA to rebuild net reserves and begin to anchor nominal variables. The growing risk is that the political restrictions of the election year extend the rate freeze, reactivate COVID spending and boost discretionary transfers to provinces to rebuild political capital, removing the chances of a successful agreement with the Fund that involves the landing of fresh funds and sales. a financial history to the market before the start of the thick crop.
The crawling puzzle of the exchange rate, inflation and the rate. The last quarter of 2020 leaves an annualized inflation rate of 54%, even with a rate freeze, contained distributive bidding and prices that were out of orbit due to the quarantine. If the BCRA accommodates the slippage of the official exchange rate to past inflation (4% per month) with the interest rate running behind (3% per month), nominality feeds back, above all, with the speed of circulation turning around, the seasonal increase in demand for pesos in December reversing (a situation encountered by different BCRA efforts in recent years), in a context of monetary overhang (surplus) , joint negotiations to run and unanchored expectations.
Inflation and crawling of the official exchange rate traveling at 4% per month and interest rate at 3% (far from the implicit rates in futures or the yield of the debt in pesos in the secondary market) has four problems:
* Nominality: accommodating the crawling of the official exchange rate to past inflation without a credible nominal anchor and with the rate running from below ends up feeding back the rate of nominality from the past to the future.
* Net reserves: negative real rates, the dollar traveling above the rate and a high exchange gap, encourage imports and discourage exports, to the detriment of the BCRA’s reserves.
* Exchange gap: Leverages the market with negative real rates to bring pesos to the MEP / CCL, putting pressure on the exchange gap.
* Financial cost: Although Finance obtains pesos at the 38% NRT rate, the bulk of the loans is at CER + 0.5% / 1% (adjusts the debt capital for inflation), and if inflation continues to accelerate (54% the annualized inflation rate of the last quarter of 2020), the Finance bill will be “expensive” even if the rate is 38%.
We understand that the BCRA should reverse this trajectory: moderate the rate of crawling of the official exchange rate and raise the rate above inflation and the slippage of the official exchange rate, to try to curb nominality in the prior of the parity and increase the cost of market leverage to position itself in dollar MEP / CCL. But the “unpleasant monetary arithmetic” plays and if the BCRA raises the rate but the recomposition of the BCRA’s reserves is not sustained, the rate hike will only feed back expectations of endogenous monetary issue. So for now We do not see that the BCRA increases the rate at the speed and intensity expected by the marketAbove all, when the BCRA comes with a positive balance in the purchase of reserves since December and Finance obtains pesos at the 38% NAV rate. It will be key for inflation in January to fall below 4% to maintain the BCRA’s wait and see position in relation to the rate decision.
Not enough with the sale of BCRA bonds. So far in January (to day 18), the sale of bonds in dollars against pesos of the BCRA to the MEP dollar and the gain on futures of the BCRA constituted the main factors of monetary absorption, reaching 67% of the endogenous monetary issue by the interests of the Leliqs / passive repos, in a month where banks disarmed passive repos due to reserve requirements. The short sheet: as there is no confidence in a fiscal consolidation / monetary adjustment process, the market that buys the bonds in dollars from the BCRA against pesos then turns around and sells the bonds to get dollars at $ 145, sinking the dollar parities of bonds and reheating the exchange rate gap. So the BCRA has to balance the equation by buying bonds in dollars against net reserves, a trend that is not sustainable over time given the meager level of the latter.
Without signs of politics or the implementation of a consistent fiscal / monetary / financial program, try to “get” to October by appealing to controls and available stocks (mainly bonds in the BCRA balance sheet) leaves the economy exposed to an acceleration in nominality and puts a ceiling on post-pandemic recovery in a stagnation management scenario. As many times in economics, the game is played on the terrain of expectations: just as it was of little use to announce a deficit of 6.5% of GDP in January 2021 when the Budget number was maintained until December, the same It could happen if the Budget target were over-met and only announced in January 2022, after having insisted all year on a higher number to counteract any idea of “adjustment”. As a great economist said, in the long run …