The debate on the exchange rate returns: with the “Cavallo formula”, the dollar should already be quoted at $ 72

iProfesional – Nobody wants pesos, “is the phrase that is repeated frequently in the street as a result of high inflation and the constant deterioration of the purchasing power of the national currency. Economists say the same thing, but with technical jargon: “There is a collapse in the demand for money,” is the phrase that is read more and more frequently in the reports of banks and consulting firms.

The translation of this concern is that Argentines reject the national currency and seek the traditional refuge in the dollar, now anesthetized by the strict control exchange rate.

But, with the background noise of the always threatening parallel dollar, and with the restlessness that already begins to cause the use of the exchange rate as an “anchor” of prices, the eternal Argentine economic debate was reinstated: how to determine whether the exchange rate is in equilibrium or if another delay, that needs to be corrected with new devaluations, begins to take shape?

No one is sure what is the price of the dollar that should be taken as “true price”: the official, the “tourist” with its 30% charge, the blue (free market), the “counted with liquidation”, the “Buenos Aires Stock Exchange”? A difficult question to determine, when you can not even have classic “homemade” references, such as a liter of super naphtha, since months ago its price is practically “frozen” by the authorities in turn at $53.99.

Thus, once again, the reference to the convertibility formula resurfaces in the debates. Some do it with nostalgia for the ’90s, such as this creature’s own father, former minister Domingo Cavallo, who slipped a few days ago that “people should not be forced to use pesos”, because people believe that they would “lose the value of their savings”. And hinted the importance of some kind of hard currency to support peso bills.

On the other hand, many prefer to return to convertibility as a reference to help determine how far one is from the “equilibrium exchange rate.” That is to say, the idea that prevailed in full model from 1 to 1 (one peso, one dollar) is refined: the exchange rate is determined by dividing the monetary base (pesos) by the reserves (dollars) of the Central Bank, in order to measure the official “support” of the currency in terms of hard currency.

This is a relationship that, although it ceased to be used in practice by the government in office when the convertibility ended after the 2002 crisis, never fell completely out of use. In fact, when there was currency turbulence, many appealed to that calculation to try to find a benchmark on the price that the US currency should have.

And the calculation resists despite criticisms about its technical shortcomings (in fact, it does not apply in other countries). “The comparison of the exchange rate in force with that of convertibility makes it possible to measure what devaluation would be required if the convertibility were to be restored,” says Victor Beker, the renowned economist and author of numerous theoretical books.

The truth is that Argentina is different: after all, in the four years of the “exchange rate control” during Cristina Kirchner’s last government, between 2011 and 2015, the convertibility dollar always showed a value similar to that of the price of the free market.

Even, years later, in April 2018, in the middle of the government of Cambiemos with a free exchange market, when the official dollar was trading at $17 and it was sniffed that this price showed a delay, this “little cue” of the theoretical value of the greenback is located at $35.

The figure seemed nonsense at that time (it was almost double), but finally, two months later, it ended up being reflected on the slates of the banks and exchange houses of the City, due to the run that generated the outflow of dollar deposits of foreign investors.

In summary, at a time when interest rates fall and many warn of a monetary expansion of inflationary potential, and at the same time, the BCRA (Argentina Central Bank) reserves tend to fall due to the need to cover debt obligations, again the looks they are put in the formula that proposes dividing the pesos by the dollars in reserve.

So what would be the convertibility exchange rate today if the “Cavallo formula” were applied? The first conclusion may surprise you: it gives a 35% lower price than the current one. Punctually, around $39. But of course, there is a catch: that is the price that arises if only the “cash” pesos are used for the calculation and the large ball of letters issued by the Central Bank is left aside, what economists call “quasi fiscal deficit “.

The truth is that every time is less those who continue to defend this linear relationship between pesos in circulation and reserves in the Central Bank. They consider that, in addition, there is a large amount of pesos absorbed by the monetary authority through Letters (especially the Leliq, which are delivered to the banks) and Notes, as well as in the form of passes and other financial liabilities.

An amount that is as, or more, significant than the banknotes in circulation, and that should be added to the “account” of the convertibility dollar.

“If the convertibility dollar is only taken out with the monetary base, the truth is that that result does not mean anything. Because there are other liabilities in the Central Bank, which are more important than that variable, since they have the same size, such as remunerated debt, passive passes or Leliqs, “economist Aldo Abram tells iProfesional.

However, if these financial liabilities add up to the current pesos of the system, the resulting total would provide a more accurate idea of ​​the “real” price of the dollar.

That is to say, the analysts affirm that the “Cavallo account” that takes the pesos of the monetary base must also add all the pesos that were “transformed” into very short-term securities, which can return to their original format ( tickets) immediately.

In this way, a quotation of the convertibility exchange rate of around $72 is obtained, which represents a value that is 18% higher than that of the wholesale ticket (exceeds $ 61). It is seen in the following account:

-Money Base (BM) at the beginning of February: $1,813,619 million.

-Leliq (at the beginning of February): $1,403,625 million.

-Total reserves: $44,632 million.

-Balance exchange rate (BM + Leliq / reserves): $72.

Less reserves, more expensive dollar?

Some analysts discuss the theoretical value of the “Cavallo Formula”, and even claim that the equilibrium price of the dollar should be much higher. They consider that not all the reserves informed by the monetary authority are available, nor are they “cash”, to “defend” against a currency exchange.

Of course, this run is complicated that can happen today in practice, taking into account that there is an exchange rate.

It is necessary to take into account the available reserves (cash) of the Central Bank to face a possible currency demand crisis turn out to be much lower than the more than $ 44,000 million that it reports in its balance sheet. So the equation can change radically.

Specifically, according to the Libertad y Progreso Foundation, discounting banknotes belonging to private companies, swaps and other securities, today the dollars available by the BCRA are barely $ 11 billion.

Therefore, if this information is taken into account, the “convertibility dollar” account shows that $ 290 should be paid for each greenback so that there is full support with the currencies that the monetary authority has.

“The convertibility dollar is how much the currency should be worth based on the monetary base, but today it cannot be taken into account because Argentina has nothing available in dollars, it should be worth as $ 500,” says Marcelo Trovato, a market analyst.

That is, taking into account the economic distortions, debt to the IMF and creditors, monetary liabilities in pesos and the exchange rate, it is clear that the convertible dollar price will not be reflected in the official whiteboards, but if the distortions continue and aggravate over time, you can start to approach the value of the parallel ticket to this reference.

This is reflected in the fact that from the point of view of foreign trade today there are several types of exchange in force, because “export duties are very different depending on the merchandise, and because of the so-called solidarity dollar for Argentine tourism abroad , so it is very difficult to establish an adjusted or equilibrium exchange rate for the medium term of the country, “summarizes Marcela Cristini, economist at FIEL.

The large amount of quotes that exist for the dollar, “creates more problems and distortions, because it generates parallel markets that make the effectiveness of the government’s economic measures be reduced,” economist Claudio Loser completes to iProfessional, who worked 30 years in the IMF.

Even with this situation so fragile for the economy and with a careful look at the fate of debt renegotiation, “a mega devaluation with liability liquefaction is more likely,” Natalia Motyl, an economist at the Fundación Libertad y iProfesional, tells iProfesional Progress.

If this occurs, this would approximate the price to the dollar of convertibility, of a higher price, and end up reinforcing its validity.

Where does the dollar go

For Motyl, today “the main concern should be how to solve the problem of confidence in our currency. Nobody wants pesos, taking out the seasonal factor, their demand is plummeting. It’s a problem of expectations. ”

In that sense, Beker indicates that the official exchange rate will gradually adjust based on inflation, and considers that, beyond the mismatches, today “it is about 20% ahead of the one in December 2015, after the dismantling of the previous exchange rate “.

Therefore, he believes that the Central Bank can be expected to “adjust it below inflation for a while.”

The concrete thing is that there are too many unstable variables and conditions that can define the future of the economy. In this context, the convertibility dollar remains one of the best references to know the price that the appetizing American ticket should have.


Por Mariano Jaimovich