The dollar puts Macri between the sword and the wall

Last week, we witnessed a true exchange rate as it had not been seen in the country for a long time. In a period of only 5 days, the Central Bank sold 7% of its international reserves, losing nothing less than USD 4.400 million.

The objective: to prevent the dollar from rising and that continues to feed inflation expectations that seem increasingly uncontrolled.

At the end of the week, the Central Bank made a new decision. This time it was even more aggressive. It decided to raise its monetary policy rate 300 basis points, at 30.25% per annum. However, when the markets round resumed on Wednesday, things still did not seem to calm down completely.

Next, an analysis of what happened and what may happen from here onwards.

National reserves are not “raffled”

Some analysts, attesting to the strong sale of reserves by the monetary authority, put the cry in the sky because the dollars were being “raffled”. Interestingly, many of these protests came from those who, in the past, imposed the exchange rate to avoid “the raffle” and, nevertheless, liquidated no less than half of the total stock of international reserves.

It is true that in a flexible exchange rate system, the dollar must fluctuate freely without intervention. Now, if that were the case, the Central Bank should not have bought USD 40,000 million in two years either.

Since it has done that… let’s say it has the right to sell them whenever it wants to. For that they are bought. Not to have them stored in a drawer, but to go out to bring calm when the markets get restless.

Now, if we analyze the moments when the BCRA started using this tool, we found that was not just last week. Already since March Sturzenegger decided to go out and sell dollars, because he judged that the rise in the exchange rate was beginning to be “disruptive”.

28D consequences

To understand why a Central Bank that supposedly has a free exchange rate is obsessed with controlling it, we have to go back to December 28.

Until that date of 2017, the Central Bank had been implementing a system of Inflation Targets where the main instrument to influence expectations and the money market was the interest rate.

The rate, at the time, was around 28%, while annualized inflation was around 20%. However, the goals were not being met and the rate was raining critics.

From the heterodoxy, it was argued that such a rate level slowed down activity. From the orthodoxy, that the tool did not work and that would generate a Lebacs bomb that would explode in the future with more inflation and devaluation.

Both arguments paved the way so that the 28D, the Executive Power not only imposed a modification of the inflation goals but a low-interest rate.

So, the main instrument that the Central Bank had to tame inflation was hijacked by the Cabinet Office.

Soon after, inflation expectations began to rise and, with them, the dollar.

The Central Bank was in a trap. The variables were out of control and he had no tools or credibility to guide them. The only thing that was left to hand was to go out and sell dollars.

Perfect storm

To the aforementioned factors, which we can call domestic, the international question was added: the dollar in the world has been strengthening day after day, and in the last ten days accumulated an advance of 3.8% against all the currencies of the globe.

What this reflects is that international funds are dismantling positions in emerging countries and “flying towards quality”, for which they must necessarily buy dollars.

Now, if Argentina was a country totally ordered in its fiscal numbers, dynamic in its labor market, and stable in its rules of the game, the swat might not be so marked.

However, it is the case that we are one of the countries most vulnerable to international turbulence, which brings us to the last point.

Between the sword and the wall

If the rise in rates of Sturzenegger is not enough, and investors still want to go, selling Argentine currency and bonds, then the problem here will not be the 28D or the fiscal policy of the United States, but something deeper: a demand for the government to give greater signs of fiscal adjustment.

Is that given the hole that the government has, the model does not close if there is no financing, and since the local market is very small, that financing has to come from outside… But if it gets complicated outside, the only one that remains is to adjust more.

A greater fiscal adjustment, which could happen by cutting spending items that exceed the energy subsidies, would have the positive effect of generating greater confidence from the creditors, generating greater stability.

However, a greater fiscal adjustment would unleash a wave of protests by unions, protesters and opposition parties, who do not miss the slightest opportunity to attack the government by “neoliberal adjuster”.

All the chips are placed in Sturzenegger. If his revitalized monetary policy manages to calm expectations, the hyper-gradualism Macri will have one more life in this game. Otherwise, you will be forced to choose between the sword and the wall.

Ivan Carrino
Originally published in ContraEconomía.