From LEBAC to LELIQ

ARGENTINA - Presentation 07 Dec 2018 by Esteban Fernandez Medrano

The government is struggling to revert the country's macro imbalances. Central Bank President Guido Sandleris significantly changed the macro policy framework, including unwinding LEBACs. However, the Central Bank must pay a high interest rate to lure banks into the new LELIQs.
• Even though the FX crisis was largely triggered by LEBAC debt, the underlying macro cause was the fiscal deficit.
• The Central Bank is now unwinding LEBACs but at high interest rates to lure banks into the new LELIQs.
• The monetary injection remains high, at 40% of M0, because of interest rates.
• The FX band limits BCRA FX intervention.
• The trade-weighted real exchange rate is weak, yet the currency is close to the floor of the band.
• The inflation story continues to play out: a positive reading, with October core CPI below the headline rate.
• But activity is still falling, as indicated by industrial activity indicators and GDP proxies.
• And the external sector is improving slowly, with the trade balance slow to respond.
• Even the dynamic energy sector has been slow to respond.
• How does it play out politically in 2019? Consumer confidence indices suggest confidence in the economy three years out, and in government honesty.

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