Floating on air?

For the “forces of heaven,” Good Friday arrived a week early with the April 11 exit from ‘cepo’ currency and capital controls accompanying the agreement with the International Monetary Fund (IMF), whose most immediate effect was Central Bank reserves growing over 50 percent overnight last Tuesday with the entry of US$12.37 billion from the IMF. Further cause for celebration was the fact that the liberated dollar dropped from the upper half of a float band set between 1,000 and 1,400 pesos per greenback without government intervention to its lower half, with the average 1,230 pesos of the first couple of days dipping to 1,160 in midweek and most experts tipping further falls. In that event President Javier Milei would be proven technically correct in his repeated denials that the peso was ever overvalued against the opinion of most economists although this weekend’s massive Easter exodus to shopping in Chile, along with Argentina’s elevated ranking in the Big Mac index and the huge disparity between the inflow and outflow of tourists, might suggest otherwise.

Milei might even be tempted to paraphrase the Raúl Alfonsín of 1987 after quelling the Holy Week mutiny by proclaiming: “Happy Easter, the dollar is in order” but early days – it might be pointed out that a more total exit from currency and capital controls by Mauricio Macri in the first week of his presidency in late 2015 was even smoother if anything without ensuring him a happy ending. What is certain for now is uncertainty with Argentines entirely unaccustomed to the dollar freely floating 70 pesos in a single day although such uncertainty is surely preferable to the rigidly fictitious exchange rates of yore – reality bites.

As might be expected from the middle initial of the IMF, the monetary bases of the new strategy are looking sounder than the economic. Halving the money supply during Milei’s 16 months in office with both the printing of banknotes and the public sector borrowing requirement consigned to the past by fiscal surplus goes far towards reducing pressure on the dollar whose supply has been padded by not only the IMF along with other loans from abroad but also the export earnings of Vaca Muerta shale reversing the previous energy deficit. The BOPREAL bonds to cover the unpaid dividends and commercial debts from past insolvency (one example of the exit from cepo being incomplete) will absorb more pesos while the six-month holding period for dollar inflow is a prudential precaution against “fly-by-night” speculative capital. Milei’s confidence in dollar retreat is so total that he speaks of only paying three digits for greenbacks while even more certain that inflation will decelerate even faster after a couple of bumps in this fiscal and monetary context with crawling peg devaluation now terminated.

Yet a receding dollar which might vindicate Milei´s disavowals of an overvalued peso also carries other problems. A meagre peso return on the dollar will not encourage grain exporters at harvest time unless they choose to cut their losses in anticipation of continuing decline or unless they can be stampeded by Milei’s reminder that export duties will return to their previous levels in July – the latter is a reminder that for all the “chainsaw” rhetoric, the maintenance of fiscal surplus this year largely rests on retaining most of an inherited heavy tax burden now that the cost-cutting effects of last year’s high inflation are no longer in play. But a cheap dollar also has a more general effect beyond the farm sector – Milei has been able to claim wage recovery alongside austerity on the back of salaries being comparatively high in dollar terms within the region even if this country has become much more expensive. Now that this equation is being changed, will a cheaper dollar signify a hidden wage increase in an election year or will workers simply be reminded that their pay is low, whatever the currency? Less pesos will have to be paid for dollarised inputs, which should lower the cost of goods and counter inflation, but would cheaper imports doom a local industry largely constructed around their substitution and drive the economy into recession? The future is not ours to see,

But for all the doubts, there is no cause to mourn the cepo – because it is not completely dead but above all, it was an impossible fetter on economic growth preventing money from coming in much more effectively than going out. Good riddance.