The optimism sparked just 10 days ago by the approval of the Base Law and the Fiscal Package in the Senate was far from being enough to allay the main fear about the Argentine economy: the lack of dollars and the difficulty, in that scenario, of eliminating the exchange rate immediately.
Unlike what happened at the beginning of the year, when practically none of the enormous difficulties faced by the economic team made a dent in the fervent enthusiasm of investors who were looking more closely at the accelerated recomposition of reserves, the barely USD 25 million that it has accumulated by the Central Bank in June, in the middle of the high season of foreign exchange income due to the liquidation of the harvest, unleashed the reverse process. The correction of the reserve accumulation goal with the IMF, which went from USD 10,000 million to USD 7,000 million, was taken as a sign that the exit from the stocks is increasingly further away.
With this difficulty in the foreground, the long list of weaknesses of the economic plan in progress began to gain importance, giving life to the renewed fears of investors, which materialized in the last week in a new rise in country risk and sharp falls in Argentine stocks listed on Wall Street.
The long list of weaknesses of the economic plan in progress that give life to the renewed fears of investors began to gain importance.
Not even the good fiscal numbers of May, with a record financial surplus and continuity that had not been recorded since 2008, could reverse the trend. On this point, there is a fear that the Government will not be able to sustain, starting next year, the adjustment that until now was based on transitional measures and on which a broad consensus was not achieved. That is, for example, what the Barclays investment bank’s report for its clients mentioned during the week, to whom it recommended maintaining low exposure in Argentine assets.
The point is also central for the Monetary Fund and, particularly, bondholders, whose prices seem to have found a clear ceiling at the highs of late April and early May. Without consolidation of the fiscal adjustment, there will be no reduction in country risk, which will make it impossible to access the markets to refinance debts and also pay the IMF from 2026.
“The IMF mentions the need to regain access to debt markets by the end of 2025, before future obligations (with the organization). We believe that Argentina will seek to postpone 2025 obligations through liability management operations,” HSBC warned during the week. As with the lifting of the stocks, expectations of a drastic reduction in country risk towards the end of the year that would allow Argentina to return to the market seem to be postponed.
The bank also highlighted that “a roadmap for the liberalization of the exchange rate is planned for the end of July, in which the flexibility of capital controls will begin with the most distortive ones”, read PAIS tax.
The price of the dollar is once again at the center of the scene and there are many in the market who suggest that perhaps a less aggressive reduction in inflation would have been preferable, but with a slower pace of exchange rate appreciation that would allow for continued accumulating reserves, keeping at bay the exchange gap that has widened again in recent weeks and in return having a clear path of lifting the stocks in the second half of the year.
It is a counterfactual: the Government is convinced that much of the high level of support that the president still retains Javier Milei It is based largely on the fact that there are clear signs, at least until last month, of declining inflation.
There are many in the market who suggest that perhaps a less aggressive reduction in inflation would have been preferable, but with a slower pace of exchange rate appreciation.
From this perspective, the exchange rate anchor continues to be non-negotiable for the Government and this was ratified once again by the Minister of Economy, Luis Caputoon Friday when he stated that “the 2% monthly crawl is maintained” and that “there will be no devaluation.”
But operators are restless. “It is likely that Argentina needs a real exchange rate much higher than what Caputo and Milei believe, because the country they have in mind is not the country we actually have today. I think that distortion is beginning to be perceived,” said the chief economist of Research at Aurum Valores, Pabo Repetto.
With that lens, if the plan is not to devalue, what remains for the Government is to accelerate the process towards the country and the economy they have in mind. That is, precisely, what is expected to begin to happen this week if, as planned, the two laws that the Government sent to Congress are definitively approved: Bases and Fiscal Package.
Minister Caputo himself announced that, from that moment on, a strong reduction in the Country Tax would be applied, which would translate into an exchange rate improvement (if in fact there was no devaluation) for importers.
The measure would contribute to sustaining the disinflation process, about which there are also doubts as of this month, and could help counteract the strong recession in the economy. Its impact on Central reserves, however, is more uncertain.
