External shock and seasonal bonanza

Between December 2020 and May 2021 (until May 7, latest official BCRA data), the monetary authority bought US $ 4,771 million on the foreign exchange market. In other words, it bought back 89% of what it had to sell between April and November 2020, to contain the official dollar and avoid a devaluation of the peso. Today, of the dollars that the BCRA buys, most of it goes to canceling debt with international organizations and intervening in the exchange rate differential. This operation is carried out by selling bonds in the portfolio to contain the alternative dollars, partially redeemed by the BCRA with net reserves.

What happened in December? The trend was reversed by tightening stocks for importers, there has been a reduction in the exchange rate differential (from 85% to 60%) and a strong appreciation of raw materials. Thus, since December, the BCRA has been able to buy dollars again on the foreign exchange market for US $ 4,771 million.

Therefore, in January, the BCRA accumulated purchases for 157 million US dollars, in February it added an additional 633 million US dollars, in March 1476 million US dollars, in April it added 1373 million US dollars and up to ‘As of May 7, she has racked up purchases for US $ 618. million. Already in April of this year, for every two dollars bought by the BCRA, one remained in the gross reserves (it bought for 1,373 million and the gross reserves increased by 669 million US dollars). Although at the beginning of May, this ratio is 3 to 1.

Net reserves having reached a minimum floor of US $ 2,241 million in November 2020, after reversing the trend, i.e. reserves without including currency swaps with China, minimum reserves of banks, government deposits and loans from international organizations, this is the key. Since these are the funds with which it is available to pay the maturities of the debt or to intervene in the foreign exchange market. If this had not happened, it would not have been viable. The evolution of this variable is essential to rebuild the firepower of the BCRA, in the event of a new exchange race (after 2020 which involved an issue of 2 trillion dollars).

Why is all this essential in 2021? Firstly, because we are in a year with legislative elections and, secondly, because if the negotiation with the Paris Club for the postponement of the debt maturity does not succeed, we would remain at a similar level of net reserves to criticism at the end of November 2020. It is worth saying that the monetary entity would be left without it “firepower” face a rush, both to contain the official dollar (which since March has been rising well behind inflation) and to avoid a jump in alternative dollars (via the sale of bonds and the buyback with reserves).

Likewise, in a default scenario with the Paris Club, the purchase of dollars would be intended to free up more dollars to aim for an economic recovery (inputs for production) and intervene in the exchange differential. That being the case, it would give you “air” to importers’ stocks. It would also avoid the shortage of intermediate goods essential for local production.

The price of raw materials is the most positive shock and with a very rapid behavior, which results, for example, in the rise of maize by 117% in the last 9 months. This rise (remember we are coming from a 2020 with a totally declining world economy) in prices is generating an increase in the trade balance unthinkable months ago. From January to April 2021, the liquidation of agriculture was the highest in history, doubling compared to the same period last year. The consequences are economic recovery (by taking advantage of private sector spending), public accounts are consolidated through withholding taxes and less monetary assistance may be requested.

In short, in May and June there will be dollars, the soybean product and the liquidation of the gross agricultural crop. With a public sector with lower peso debt maturities, the risk of moving towards a system of higher monetary issues is lower. Something nothing less, in a year where there is no room to cover the fiscal hole in the same way as was done in 2020. In other words, more dollars available and fewer pesos to issue, at least in the next two months.

Proper administration of the BCRA will be essential given this seasonal abundance. It will be up to the government to take advantage of this to make the essential corrections to the existing macroeconomic imbalances, be able to minimize the impact. Arriving in the second half of the year, without the liquidation of agriculture and with the maturities of the debt in pesos, the situation will be totally different. More in a context of increased pressures for public spending, in an election year and with the dollarization process that still occurs in those years.

* Federico Pablo Vacalebre. Guest columnist, he is a professor at CEMA University.

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