Caputo’s turn: he no longer wants to exit stocks to strengthen reserves and the market is skeptical of the new plan

Although the Central Bank has not communicated – and will not – if it has put into practice the announcement already made, by which it will absorb the pesos issued to buy dollars in the official exchange market, this measure represents a radical change in the approach communicated so far regarding the path to eliminating exchange controls. And the first market reaction to that turn was not good.

Although only with the announcement the exchange difference began to decrease and the financial dollar returned to the $1,300 range, the truth is that it turned out to be very difficult for bondholders to digest this news. The reason is clear: although I was accumulating a little, The central bank will add even fewer reserves than beforewhich raises questions about the availability of foreign currency when it comes to debt payments. This is despite the fact that, forced by that urgent reading on Saturday, on Sunday the Economy Minister, Luis Caputo, reported that bondholders’ dollars were already placed in safeguards. In any case, this is the core of the issue that worries the market: the accumulation of reserves is no longer the government’s absolute priority.

This interpretation, which quickly took root among investors, is contrary to what caused the success of the first phase, or “Phase 1”, of the Caputo plan: nothing mattered as long as the Treasury had a fiscal surplus and, above all, the Central Bank could buy dollars. This stopped being the case, as partly explained by the government itself, due to seasonal issues, but now, in addition, it no longer matters. At least that is how the market accepted it, although the economic team tries to make that view relativistic. “It’s not that they don’t matter, there may be other sources in the coming months,” they say. In any case, the official message in this sense is emphatic: the priority is to reduce inflation. “It’s not that reserves don’t matter, but fighting inflation is important, between accumulating reserves and fighting inflation,” the source explained.

Javier Meili himself gave the first hints last week in the framework of his exchange with his followers on social networks during the celebration of July 9. It was then that, when listing the three conditions necessary to raise the shares, he mentioned the elimination of remuneration liabilities, the elimination of puts and the “convergence of inflation and the devaluation rhythm around 0% monthly”. In that brief text, there was no mention of the dollar shortage or the 15,000 million USD of which he once said that “if I had it, I would have raised the stock right now”.

In light of the increase in risk appetite in the country, which closed at 1,555 basis points, and the decline in dollar bonds, the new rhetoric about the economic plan was far from reassuring investors. Although the consensus on the centrality of lowering inflation as a means of maintaining social support and thus being able to pursue reforms is solid, doubts are growing about the recessionary effect of the decision to completely dry up the peso market, which, ultimately, will also undermine the government’s ability to pay.

“Thinking about how the plan works, The weak side is obviously the accumulation of reserves”, highlighted consulting firm PPI, which noted that not only would the central bank hold fewer deposits when there was a positive balance, but that it would lose reserves when the balance was neutral. “As we are entering a period in which seasonality will play against BCRA, a neutral balance of purchases and sales in the MLC (the result of daily purchases and sales) implies a negative balance of reserves. For example, in a month of twenty business days in which ten days with daily purchases of US$100 million and sales of US$100 million result in a neutral balance of BCRA, assuming a difference of 49.3% (purchase ratio of 33%), BCRA would sell US$670 million. In a context where net reserves sank to a minimum of -USD 6,026 million (taking into account that the Treasury has US$2,217 million on deposit in BCRA), it is clear that Having positive reserves will no longer be a prerequisite for “efficient” exit from stocks“, admitted the consultant.