Alea iacta est
In this report, we are going to revise some of the political and economic challenges that Macri will face, in order to better understand the announcements he is expected to make soon after swearing in.
Those challenges include the lax monetary policy fueled not only by the monetization of the fiscal deficit but also by the BCRA sterilization cost and the exposure in the non-deliverable-future (NDF) market. According to our calculations, the central bank losses over the next months would be close to AR$ 47bn, or almost 8.5% of M0, on top of the close to 17% sterilization costs.
If the FX rate movement were more abrupt the NDF costs could be as high as AR$ 80bm (14% of M0 or 31% of M0 including Lebacs). Such “off balance sheet” exposure represents an incentive for the BCRA to try to avoid a significant FX overshooting or even delay the FX rate adjustment. It also signals the difficulty the new authorities will have to curb inflationary pressures.
On one hand, an abrupt FX rate liberalization, given the repressed dollar demand, has the risk of generating herding behavior and with it an FX-rate overshooting. On the other hand, if the government does not let the currency fluctuate “enough”, the risk is that the market perceives such controlled FX rate as still overvalued and any intervention defending the local currency as a dollar buying opportunity, with the consequential wait and see for exporters. This raises the question of which might be considered an “adequate” FX rate, minimizing both the undershooting and overshooting risk.
Our simple calculation gives us that with the actual current account deficit and terms-of-trade, the historical relationship with the TWRER would imply a current FX rate of 13.8 AR$/US$ or 14.55 AR$/US$ in March.
In perspective, this presidential election has been quite a surprising political race. For the first time in Argentina’s history the president was elected in a ballotage. And contrary to initial polls, the official candidate did not manage to overcome the rejections of the opposition voter.
But precisely the surprising result of the elections and a relatively close call in the ballotage drove the CFK’s government into a rather resentful attitude, throwing “sticks to the wheel”. This leaves an uneasy sentiment towards the needed coexistence in the Congress.
For the time being there is not much more to do than to await the actual measures of the next government and its political skill (and that of its broad-spectrum Cabinet) to overcome the macro difficulties.
Now read on...
Register to sample a report