Volatility is transitory by definition and yet the current scenario of turbulence looks set to continue for some weeks until the agreement with the International Monetary Fund (IMF) is signed and sealed – rough waters thus lie ahead but the real question is whether there will be any lasting damage once the uncertainty is banished by an IMF deal. A major worry here is not so much the gap between the official and parallel exchange rates, which is always reversible, as the level of Central Bank reserves now being back to the starting-point of the Javier Milei administration – a key point for the IMF in particular and all other creditors in general because their bottom line is always going to be the ability to repay.
Economy Minister Luis Caputo has come under fire in the process but more for the wrong than the right reasons. He has been rapped for admitting that a change in the exchange rate system is in the offing (would anybody have believed him had he denied it?) and even less reasonably for not spelling out the details of an IMF agreement still being negotiated, when preannouncing any devaluation with dates and percentages would unleash a stratospheric speculation far worse than the current uncertainty. Where he is more at fault is for painting himself into a corner with an exchange rate in need of adjustment – the crawling peg devaluation of a monthly one percent now further below an inflation inching upwards adds ever more credence to the overvalued currency claimed by the majority of economists (and ratified by any international price comparison).
Much of the erosion of reserves stems from the market intervention required to maintain an increasingly unsustainable exchange rate but there is also considerable drainage from the surging appetite for imports encouraged by both a strong currency and this government’s laudable moves towards free trade (in striking contrast to Milei’s bosom pal Donald Trump). The balance of payments is given far less attention than Central Bank reserves but the trade surplus needed to offset last summer’s massive tourist exodus could be almost halved from last year’s robust US$18 billion with an exchange rate discouraging exports while stimulating imports.
Plenty of cause for concern and yet there are no grounds for the uncertainty being anything but transitory once the details of the IMF agreement become known. Whatever the outcome, the government remains committed to balancing the budget without printing money while advancing in deregulation. At the same time the possibility of ending ‘cepo’ currency and capital controls mooted earlier this month is starting to evaporate because the IMF remittance is unlikely to suffice to exit without trauma in electorally sensitive times. Should the IMF agreement fall short of freeing money markets, this would be the next hurdle for the libertarian government, testing its confidence that a fiscal surplus is a decisive difference between their exchange rate policies and previous failed experiments to revalue the currency. But some form of float will be inevitable because there is nothing worse than the Central Bank selling dollars to maintain a predetermined exchange rate.
Some might ask why enter into an IMF agreement in the first place if the prelude is so traumatically turbulent? That question should not so much be asked of Milei as of his predecessors, especially Mauricio Macri with his 2018 stand-by of US$44 billion but also the Frente de Todos administration, which renewed that agreement despite internal dissent – without the reserves to repay in cash, Milei has no other alternative except default. An IMF agreement should serve to bring down country risk sufficiently to enter international credit markets and start servicing public debt with future debt like most other countries – a logic which presumably induced a majority of Congress to extend an otherwise inexplicable blank cheque.
A prime complication in this turbulent scenario is overlapping with the premature start of the electoral campaign (accelerated by City Hall’s decision to bring forward its midterm elections in order to keep the issues local and avoid the coat-tails of a Milei still popular from his success against inflation, only for this contest to be hopelessly nationalised). For the past three decades most elections have been reduced to the “It’s the economy, stupid” of Bill Clinton and James Carville but perhaps today’s economic situation is best explained by saying: “It’s the elections, stupid.”
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