While the entire country was preparing, on a long weekend Saturday, to see the national soccer team in the final of the Copa América, the government launched a series of measures to put more controls on the foreign exchange market. The provisions, in short, aim to hinder access to the market called Contado con Liqui.
In this unofficial but legal market, dollars are bought or sold indirectly. To buy them, the client uses pesos in the local market to acquire a bond issued by the Argentine government, denominated in dollars, or the share of a company, and then sells them against dollars deposited in an account abroad. The result of dividing the amount of pesos you put in by the amount of dollars you receive is the exchange rate called Cash with Liqui (CCL). The measures implemented last weekend by the Central Bank (BCRA) and the National Securities Commission (CNV) muddied the most common operation, the one carried out with bonds.
The idea that the government would put more restrictions on the foreign exchange market before the elections is not surprising. In fact, I mentioned it in my last column in the nation. What was surprising was the timing. Not only because of the anticlimactic of having done it on that special Saturday for the country, but more than anything because it seemed very hasty. It was expected, but not while the Central Bank was still in a comfortable situation, buying reserves in the official exchange market.
Given that there is an asymmetry between the information that the market has and that of the Government about the amount of reserves that the latter actually has, compared to what it needs until the elections, the measure naturally gave rise to suspicions. Either it was an error, not rulable at all, or the economic team knows something that we do not know. The situation must be more desperate than we suspected. The popular saying says it: a confession of part, relay of test.
In fact, there were already some signs that the government’s situation was not comfortable. To keep the gap between the official dollar and the Cash with Liqui at bay, the Central Bank began to intervene in the latter market since October 2020. Intervening means doing the opposite operation to what an individual or a company does when it buys dollars in that market. That is, the BCRA sells bonds in its portfolio, receiving pesos, and then repurchases these bonds using dollars from reserves, in order to maintain more or less the same amount of bonds that it had at the beginning of the operation (although they would have sold bonds in net terms, in recent months).
From October 2020 to May 2021, the Central Bank would have used US $ 938 million of international reserves for this purpose. But exchange rate pressure had intensified since mid-June, and this began to put reserves in check. According to a note by Mariano Gorodisch published in El Cronista, in the first six days of July, the BCRA would have sacrificed US $ 100 million to contain the CCL. And that on June 30, the CNV had a meeting with operators, in which it would have suggested that they “loosen up” with operations in the CCL.
The market’s reaction to the measures on Saturday, July 10, was in line with those who discover that the reserve situation is more desperate than they thought. The peso depreciated sharply in the Cash with Liqui and on the black market, euphemistically called the blue market. Or rather, should I say in one of the Cash with Liqui. Because from the measurements, there will be two. One is the one that operates with government bonds in public transactions, and the other, the one that operates with bonds between private companies or with stocks. A kind of official CCL and another blue. Things that happen only in Kirchnerist Argentina.
The mother of all problems is the excess of pesos that is generated by the monetary financing of the fiscal deficit, and the lack of dollars due to the lack of credibility of the Government. Between January and June 24, the Central financed the Government in $ 240,000 million, 20% of what it issued in the same period of 2020. Since then, it has issued $ 170,000 million for that purpose.
As public spending accelerates ahead of the elections, monetary issuance also picks up momentum. A part of those pesos are taken out of the economy (it is called “sterilization”), to which I will refer shortly, but others remain in the system. Thus, the growth of the monetary base, which decelerated sharply until May, has already begun to gain momentum.
At the same time, no dollar is left over. First, because nobody wants to bring any. Second, because the greater the exchange gap, the more exports are discouraged and the more imports are stimulated. Anyone without the slightest knowledge of economics is aware that, the higher the gap, the better it is to buy imported goods or with imported components, since they are sold at prices compatible with the official exchange rate. That’s why there is a shortage of cars and various durable goods, despite the fact that imports are flying: they rose 42% in the first five months of the year. This, which seems so natural, seems unknown to the economic team.
Another problem facing the Government in the coming months is the payment of debt in foreign currency. Between interest and amortization there are maturities of US $ 6.7 billion in the second semester, including payments to the IMF. Discounting the US $ 4.3 billion that we will receive from the IMF’s Special Drawing Rights, there are net payments of US $ 2.4 billion. This compares with the US $ 3.05 billion accumulated by the BCRA in the first semester. But it does not take into account that agricultural exports will fall in the months that follow, while energy imports will grow in the cold months.
Very cold, but we are in the exchange oven. A self-imposed oven by the Government. The bad negotiation of the debt, the lack of progress with the IMF and the errors of economic policy put us in this situation, in which we have to count the dollars as if we were a warehouse in the 19th century.
This scaffolding tied with wires with which the Government intends to reach the elections without a devaluation of the peso in the official market, has another even more worrying component: that of the banks. To get pesos from the field, the BCRA places Leliq in the banks, which give it pesos in exchange. The Leliq went from 1.1 trillion pesos on December 10, 2019 (63% of the monetary base) to 3.7 trillion pesos in mid-July (almost 140% of the monetary base).
Banks are choking on Leliq, crowding out credit to the private sector. Today bank loans in pesos to the private sector are 3.1 trillion less than the Leliq, while they were 63% higher than the Leliq on December 10, 2019. This destruction of the nature of the banks had another turn of nut at the end of May, when the Central allowed them to replace Leliq with government bonds for the computation of part of the reserve requirements on deposits. Since then, they have added billions of pesos of bonds to their portfolio. The productive revolution will have to wait. For now, the entities are busy financing the Central Bank and the Government. The cost of the interest of the Leliq, which could exceed 1.2 trillion pesos in 2021, is paid in part with what the Government is saving in pensions.
Thus, instead of solving problems, they are tied with wires so as to reach the elections without exploding. They try to hide them, not eliminate them, although, as in many other cases, their inexperience may play a trick on them. The introduction of more exchange controls is only going to delay the loss of international reserves a little, but not by much.
Meanwhile, the expectation of an increase in monetary issuance in the coming months and a devaluation after the elections will continue to fuel the demand for dollars. Only this will now be channeled through other mechanisms. You no longer have to look so much at the Cash with official Liqui, but at the CCL blue, and at the blue, since there will be more operations in these markets. As they are more illiquid (they have fewer daily transactions), they have more volatility than the official CCL had. We will see more sudden movements from one day to the next. Just the opposite of what the Government was looking for. They were looking to cover up a problem, but what they will probably achieve is many more newspaper covers and comments on the networks about the dollar. Like everything that is tied with wires, the solution may be more ephemeral than planned.