On Sunday, a Wall Street guru again criticized the official exchange rate scheme: “It always ends in devaluation”

On Sunday, a Wall Street guru again criticized the official exchange rate scheme: “It always ends in devaluation”
On Sunday, a Wall Street guru again criticized the official exchange rate scheme: “It always ends in devaluation”

Robin Brooks, an influential Wall Street economist, warned of the dangers of maintaining the crawling peg at 2% per month. Bloomberg

The Economist Robin Brookswith extensive experience as an analyst in some of the most influential banks and institutes on Wall Street, and who usually pays special attention to emerging markets such as Argentina, warned again about the danger of the Government’s exchange rate scheme that depreciates the peso at a rate of 2% per month: “It always ends in devaluation”he warned.

In a post on his account XBrooks – who worked as head of currency strategy at Goldman Sachs, was chief economist at the Institute of International Finance (IIF) which brings together the world’s leading banks and is currently an analyst at the Brookings Institution– warned about the way in which the crawling peg (devaluation rate) is sustained by the Central Bank, that is, by the exchange rate anchor as a basis for the economic program.

“Argentina is a country that believes in pain for pain’s sake. crawling peg This means that the peso is once again completely overvalued, so the drop in imports has to do all the work on the trade balance. Historically, Argentina has never sustained this. This always ends in devaluation.“, the economist said.

In this regard, he attached a graph showing the trade balances for May of each year since 2000 onwards based on official sources. This graph shows how in 2024 a large reduction in imports – together with a growth in exports – explained the notable improvement in the external trade balance after a deficit recorded in 2023.

Brooks, who usually dedicates numerous posts to emerging economies and in particular to Argentina, had already warned this week – in the midst of uncertainty in the markets that resulted in falls in bonds and rise in country risk – about the contraindications of the exchange rate scheme that they support. Javier Miley y Luis Caputo after the devaluation in December.

Fuente: Robin Brooks (@robin_j_brooks)

“Argentina devalued in December, but any potential boost to exports has now been squandered. This is because the real exchange rate (in black) has risen again to the level it had before the devaluation. Argentina is the same story over and over again. Different leader. Same mistake.…,” Brooks said.

Brooks’ view is confirmed by data published by the Argentine Central Bank itself. ITCRM (Multilateral Real Exchange Rate Index) calculated by the monetary entity was located on July 3 at 87 pointsbelow the theoretical equilibrium exchange rate of base 100.

Following the historic 118.3% jump in the exchange rate applied on December 13, which took the wholesale dollar from $366.45 to $799.95, the ITCRM reached a recent high of 162.2 points, which could be defined as a very high exchange rate and, from this point of view, extremely competitive for exports of goods and services produced by Argentina.

Caputo ruled out a new devaluation of the official dollar and assured that they will continue with the crawling peg” at a rate of 2% monthly, in addition to maintaining the “blend” by which agricultural exports are settled 80% in the exchange market and 20% in the stock market at the “cash settlement” parity. Based on the above, the exchange rate restriction would only be eliminated in a third stage of the economic program.

But these definitions were not the only ones. The Government sent to Congress a progress report on the draft law Budget 2025which establishes projections for economic activity, inflation and the dollar, among others. According to the text sent to the Chamber of Deputies, it is estimated that the Official exchange rate will end the year 2024 at $1,016.10which represents an increase of 25.7% year-on-year, which contrasts with the 130% inflation projection provided for in the so-called “Law of Laws”.

This very gradual devaluation applied by the Government, which also contrasts with the annual inflation projections contemplated in the latest REM (Market Expectations Survey) of the BCRA, of 143.5% for 2024, begins to to increase the debate among economists about a possible “exchange rate lag” that is brewing, given the role of exchange rate “anchor” that the government of Javier Miley He is blaming the dollar for curbing inflation, a strategy that previous administrations also used.

 
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