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After a semester in which there was a sharp acceleration and subsequent fall in the inflation rate, in addition to a retraction in the level of activity and a collapse in income and consumption –especially concentrated in the first third of the year–, the Government faces a second half of 2024 with the hope of maintain the brakes on inflation to allow a recovery. Meanwhile, economists warn about the evolution of exchange rate policy and they maintain that the exit from the stocks – a functional restriction to the scheme implemented until now – is key to the eventual rebound in activity.
He dollar value It is one of the key variables that companies, financial markets, the Government and even the International Monetary Fund (IMF) look at. The organization repeatedly raised his warnings regarding currency appreciation. And he explained his positions in relation to the final point for the 80/20 scheme for exporters, and the need to adjust monetary and exchange rate policy to get out of the exchange rate trap.
After the initial devaluation that occurred in December, The Government implemented the crawling peg, which determines a rise in the dollar at a rate of 2% monthly. In management, they cling to this scheme as one of the key premises of the economic manual itself. While the President Javier Milei rules out a new exchange rate jump and resorts to sly mockery in the face of warnings about the future of his exchange rate policy, economists and investors say they see yellow lights ignited by the exchange rate appreciation process and its short and medium-term consequences.
“I am concerned about the film, not the photo,” said former Minister of Economy Hernán Lacunza, when analyzing this variable. Today the real multilateral exchange rate, according to an index prepared by the Central Bank (which compares the evolution of the peso against a basket of currencies) is at 89 points, after having touched 160 after the December devaluation, a value that in the series in question is even below the level of August 2023, before the devaluation of former minister Sergio Massa.
“The level of the real exchange rate is today similar to August, when the IMF forced Massa to make the last exchange rate jump. At that time, according to them, the delay was 20%,” explains Lorena Giorgio, chief economist at Equilibra, who warns of the “signs of exhaustion” of the current crawling peg, after pointing out that the Central Bank had difficulties in adding international reserves in recent weeks, even in the seasonal peak of agricultural currency settlement.
“Milei’s flag was to do something with the exchange rate. First it was dollarizing; then a coin competition. Today accelerate the pace of crawling peg It could be counterproductive for the Government due to prices and expectations. Therefore, we project some type of exchange rate correction towards the end of the year, at some seasonally positive moment for the demand for pesos, so that it has the least possible inflationary impact, hand in hand with some flexibility of the exchange rate,” adds the analyst, who projects an official dollar of $1,500 at the end of the year.
The yellow light on the exchange issue moves to the dynamics of the external sector and the recent (in)ability of the Central Bank to accumulate reserves. After the last approval given by the IMF in the review of how what was agreed is going, the reserve goals were adjusted forward. Now a fall in the organization’s net holdings is discounted for the remainder of the year. So far in Milei’s management, The Central Bank bought more than US$17,000 million and, between sales and payments of debts and imports, was able to reverse the negative holding as of December 10 (-US$11,500 million) and show a neutral balance at the close of this edition (gross remained at US$29,944 million).
“The IMF numbers say that the Central Bank will lose US$3 billion in the third quarter and will recover US$500 million in the fourth. The big question of this scheme is how the external sector closes”, says economist Sebastián Menescaldi, associate director of Eco Go, who projects a drop in GDP of between 3.4% and 4.7% this year. “Until now, the market has been assessing that inflation will fall, that the fiscal situation will be positive, that reserves will grow and that the surveys will be good. In the second part of the year there will be a test of the market, because inflation may not go down and will rise in June, and because reserves will stagnate and possibly fall,” he analyzes.
Up here, The Central Bank added foreign currency in the months of greatest supply, also taking advantage of factors that allowed it to postpone payments, such as the issuance of Bopreal or the quota scheme for imports. The recession also had an influence, keeping the volume of imported goods and inputs limited. However, the positive balance began to decrease (US$156 million were lost on Wednesday, the largest daily sale of the current administration). For July there are pending bond payments and maturities with the IMF and part of the shorter Bopreal. In parallel, the 80/20 scheme for exports designed to derive greater supply to financial dollars (around US$1.6 billion per month) and contain the gap up to this point implied, in fact, a lower income of foreign currency for the reserves.
The lowering of inflation, from the peak of 25.5% in December to 4.2% in May, it is the main achievement that the Government celebrates. The “exchange anchor” of the crawling peg and the decision to postpone rate increases, which were applied in June and which, therefore, could interrupt the series of five consecutive months of slowdown in price increases. While the IMF lowered its inflation projection to 139% for the year, the market estimates that the index will be higher.
“We see 160% in the year, because we expect an exchange rate jump when the stocks are opened,” says Andrés Borenstein, chief economist at Econviews. “We do not believe that it will fall to 4% monthly, because inertia plays and salaries too and, in addition, the rate adjustment will continue,” adds the economist.
“Today the exchange rate is not in a terrible situation like it was with Cristina in 2015, but These values go against the activity level: It generates more outbound and less inbound tourism and exports are less competitive. But I don’t see that the 2% monthly rate is going to change, unless the stocks are lifted. “It is a complex operation and it is understandable that whoever has to decide looks at the risks,” concludes Borenstein, who projects a gradual exit from exchange restrictions this year, in line with the guidelines drawn up by the IMF in its last staff report.
The other way, the activity level is the negative data, with projections for 2024 that are worse than those that were managed at the beginning of the administration. According to their latest estimates, the IMF and the World Bank project a drop of 3.5% for the entire year. If the effect of agriculture is excluded, which has a rebound after the 2023 drought, The expected drop for 2024 is 6%.
“Getting out of the stocks is the only expansive thing the Government has to do this year. And the big issue to resolve is how to address this, eliminate the PAIS tax, and ensure that the adjustment is not a dependent trap,” summarizes Consultora Ledesma economist Gabriel Caamaño, when analyzing the dynamics of the level of activity and the factor that could generate a greater foreign exchange income via investments.
“The level of activity and the labor market are the things that Worse news is going to be given to the Government this year, and it was foreseeable due to the policy scheme implemented and because the exit from the stocks was left for later. The fiscal adjustment was faced with an increase in the tax burden on tradable goods through the PAIS tax, and that is not at all expansive,” explains the analyst. According to Indec, in the first quarter the economy contracted 5.3%.
“We are going to a recovery, because Nobody expects the economy to detonate and remain down there, but it will be something softer and calmer. Also for employment, which is a variable derived from the level of activity and expectations,” concludes Caamaño.
The current scenario does not allow us to project a strong rebound semester for consumption. It is the main component of GDP and today shows a context of weakness, associated with the acceleration of inflation and the loss of purchasing power of income, two key variables for which there would be no short-term strengthening. According to data from the consulting firm Scentia, total consumption grew 2.4% in 2023, but It collapsed since the beginning of the administration, with a bottom in April (13.8% year-on-year) and, since then, the figures have remained in negative territory, but in less depth.
In the first five months of 2024, according to the consulting firm, it accumulates a drop of 7.8%, and in analysts’ projections, the coming months will show, in the best of scenarios, a stop to this collapse, while waiting for “revenge” in 2025. “The dynamics are going to be very directly related to the recovery of people’s income, and that is not going to be quick or homogeneous,” says Osvaldo Del Río, director of the Scentia firm. “The dynamics will depend on the sectors, because not all of them will recover at the same speed, and that directly impacts the ability to improve people’s incomes. Those who are informal are going to have everything more complicated, because it is always the group that has the most difficulty. So, the recovery of consumption will be closely associated with that,” adds the specialist.
Indec data show this double speed in income: in the first quarter of the year, accumulated inflation was 51.5%, while Formal salaries grew by 49.5% and informal salaries by 45.5%.
“Milei is generating things that are pro-stability, such as having a fiscal surplus and giving some rationality to the economy. We see a recovery in the second semester; It is clearly not a V, but we believe that real wages will begin to recover and that will provide some capacity. AND another variable is credit: With competitive rates, it is growing both at the family level and among companies. To this we must add the key variable: whether or not the trap is lifted, and when,” concludes Borenstein.
