The president has taken on the role of a skilled plumber and is working to shut off all the leaks that are draining pesos from the economy. This action is expected to weaken the rise of the dollar.
Regarding the first issue, over the past six months, Argentina has shifted from a fiscal deficit to a fiscal surplus. This was a long-desired outcome. With the surplus pesos, the Minister of Economy plans to purchase dollars, which will be used for future interest payments on the national debt. This strategy aims to achieve long-term sustainability of the debt.
As for the second issue, bonds amounting to $17.7 trillion had been issued with a guaranteed insurance policy, allowing holders to demand full payment whenever they chose. The government succeeded in renegotiating 78% of these guarantees, albeit with a premium paid to the banks to give up this right. There may be an offer to convert the remaining 22%, meaning the leak hasn’t been entirely sealed but has certainly been reduced to a drip.
This situation does not sit well with authoritarian figures.
The practice of professional, critical journalism is a vital pillar of democracy, which tends to ruffle the feathers of those who believe they alone hold the truth.
Now, let’s discuss the third issue. During the Kirchner era, the government faced fiscal deficits and financed them through the Central Bank’s issuance of pesos. The volume of pesos in circulation was so massive that, if left unattended, hyperinflation seemed likely. The same Central Bank that issued these pesos to finance the treasury would later absorb them through financial instruments, paying banks interest rates higher than fixed-term deposits. This created a win-win situation for the banks while the Central Bank accumulated significant liabilities and was burdened by enormous monthly interest payments.
With the president’s intervention, the debt held by the Central Bank is now overseen by the Treasury, where it rightly belongs. This coming Monday, the Central Bank’s interest-bearing liabilities will be exchanged for a liquidity fiscal instrument (LEFI). The Treasury will manage this debt, paying interest that will be accumulated and determined by the Central Bank, becoming the new monetary policy rate. Approximately $20 trillion will be issued, effectively closing this financial leak, as the accumulated interests will not be payable but rather refinanced.
Concerning the fourth issue, the Central Bank purchases dollars and emits pesos, which results in increased money supply. Currently, it buys dollars at $926.75 and can sell them in the market for $1,330. This process helps sterilize the emitted pesos while retaining a fraction of them. For every dollar that enters, 0.70 cents are sold, leaving 0.30 cents.
However, the Central Bank barely purchased $177 million between June 1 and July 16, which was likely lost through recent sales. Nonetheless, the commitment is to sterilize all pesos emitted since April 30, amounting to over $1.5 billion. At this pace, we risk running out of pesos.
Let’s consider the monetary circulation: as of June 30, it totaled $12.4 trillion, equivalent to about $13.6 billion at the wholesale exchange rate of that date. There are plenty of pesos available to withdraw before we face a shortage.
Now, regarding peso deposits: as of June 30, they amounted to $68.6 trillion, translating to about $75.3 billion at that date’s exchange rate. Meanwhile, the treasury’s debt in pesos stands at the equivalent of approximately $41.5 billion, while inflation-adjusted debt comes in around $143.5 billion, leading to a total of $185 billion.
Is it feasible to lift the capital controls? It’s essential to note that if you sum the monetary circulation, peso deposits, and debt, it reaches an astounding $232.4 billion, while gross reserves stood at just $29 billion, effectively yielding negative real reserves. There’s a significant stock issue at play.
Not all depositors will convert to dollars, and neither will many bondholders in pesos, a majority of whom are banks.
It’s true that the stock of pesos inherited by this government is massive, while the stock of dollars is virtually nonexistent. Therefore, those advocating for an immediate lifting of the capital controls are indulging in wishful thinking—it may be a fascinating scenario to discuss but isn’t practical.
Are we entering a new phase? In the first half of the year, the government managed to bring public accounts in order, achieving a fiscal surplus and significantly reducing inflation. As we enter the second half of the year, we face a new stage in the economic plan, characterized by zero issuance and very positive interest rates in relation to inflation, likely leading to a pronounced recession.
So why is the dollar rising? Many monetary actors, having witnessed the Kirchner era, are clinging to the dollar as a safe harbor, unaware that this harbor has a leak. The recession is so severe that it’s unlikely the dollar can keep rising for long. For instance, the internal rate of return on certain financial instruments is projected at 67.2% annually by March 2025, while inflation over the next year is expected to hover around 40%. This results in a real positive rate of 19.4%. As inflation continues to decline, holding dollars will make less and less sense.
Currently, the MEP dollar is priced at $1,330. If you apply that 67% annual rate, it would need to rise above $2,221.10 within twelve months to outperform competing financial products. If the government proceeds to absorb pesos from the economy, it’s likely that the dollar will rise much slower than inflation, with interest rates remaining positive against it.
Business prospects for the second half of the year will be very different from the first. During the first semester, favorable assets saw significant price increases. Sovereign bonds rose considerably and paid out interest and principal in January and July. The same trend occurred with inflation-adjusted peso bonds, and negotiable obligations shifted from yielding double digits to single digits. The inflation rates since December 7, 2023, have far outpaced alternative dollar movements. Prices for soybeans and corn have dropped and could fall further in the local market. Financial instruments linked to the dollar did not perform well, while investments in Cedears brought in profits.
What’s in store for the second half? This is a question best reserved for private reports, as the business landscape is profoundly shifting. New financial instruments are likely to emerge, requiring close attention to market interest rate maps, which will help us understand the impact of government decisions.
Do we have a roadmap? Yes, it’s available today, and it may surprise you with the interrelations it reveals.
Lastly, before wrapping up this discussion regarding soybeans, I must mention that I shared insights in December, January, February, and March, and I was deemed unrealistic. The latest global supply and demand report reveals a stock-to-consumption ratio of 31.8%, while equilibrium should be closer to 25%. With 128 million tons of soybeans surpassing a global consumption of 402 million tons, it’s improbable that prices will rally given these figures. Brazil is projected to produce 170 million tons in the upcoming cycle, while China faces economic contraction and high soybean stocks, especially with the potential re-election of Donald Trump and the risks of a renewed trade war reminiscent of 2018 when Argentina coped with lower soybean prices.
Source: https://www.perfil.com/noticias/economia/las-4-canillas-de-javier-milei-por-que-sube-el-dolar-y-que-esperar-para-el-segundo-semestre.phtml
