Economists’ reactions and analysis to Miley and Caputo’s announcements: “This is even more extreme than convertibility”

A policy of freezing and even eventually cutting government-issued pesos through the Central Bank’s “monetary base” announced by the President Xavier Miley and the Minister of Economy, Louis CaputoThe analysis, aimed at accelerating the “deflation” of the economy and leaving dollar purchases by economic agents without fuel, was received with some skepticism by professional economists consulted by Infobae.

“What happens is that they should make (the announcements) along with the increase in interest rates,” he said. Jorge VasconcelosChief Economist of the Isle of Mediterranean Foundation, who pointed out that the government is going to justify the higher financing cost of the debt (due to the transfer of BCRA’s liabilities to Treasury’s liabilities) with the quasi-fiscal benefit of selling dollars in the cash market with settlement (CCL)

Of course it will, Vasconcelos clarified, “as long as the BCRA buys dollars in the Single and Free Exchange Market (MULC). In addition, the economist recalled that the CCL market works with bonds and wondered if the new policy would affect their parity and, therefore, the “country risk”, which, like the blue dollar, has increased sharply in the last weeks.

Economist Ivan Carrino For his part, he explained in a post in X that the announcement aims to eliminate the exchange rate. “The official announcement is the following: BCRA is going to stop issuing pesos to buy dollars. Mechanism: issue $1 to buy $900 at the official store. Then it sells 0.6 USD (at $1,500) in the CCL and receives the $900 it issued. That is, it absorbs what it emits and keeps the difference in USD. Accumulate reserves without changing the amount of money. It seems that the objective is to cause a rapid fall in the CCL and eliminate stocks with a small difference (“up”). he indicated.

However, shortly after, Minister Caputo himself corrected himself by pointing out on the same social network: “Hello Ivan. No, the absorption is due to the amount of the load. That is, the Central Bank only withdraws the pesos issued and keeps the net dollars to the extent that there is a difference. Embrace.”

This measure was directly criticized by the Economist Carlos Rodriguezwho was named as a “senior adviser” by Milley during the 2003 electoral campaign but had no influence in the current administration, has in fact become a serious challenger.

About the new policy, he wrote in a post on the X Network (formerly Twitter): “Another Millet tax. Previously they would buy (the dollar) at 900 and sell it at 900 + country tax 17.5%. Since they are now reducing I.Pais and in December it disappears, they found this trick of selling it at CCL which is 900 + the difference and the difference is 50% or more. Another work with the excuse of millet that they are not going to broadcast more.

That is, for Rodríguez, the declarations are a government tool to increase public income and thus face the immediate financial burden of transferring the debt from the Treasury to the BCRA and lower future collections due to the reduction and expiration of the validity of the tax PAIS (on imports and purchases of dollars), which was fundamental in the result of the public accounts in the first half of the year.

Vasconcelos ran some numbers on the official arithmetic. With the current exchange differential, he calculated, “they need to sell 66 cents in CCL for every dollar they buy in MULC. With that, they officially nullify the weight of the purchase process.”

Even if the new plan is laudable, Vasconcelos raised another question: Wouldn’t it be more logical to implement it with a floating exchange rate? It would be a dirty floating one anyway.”

Of course, lending some credibility to the announcements, Vasconcelos pointed out that if the new plan works “the exchange rate differential should narrow somewhat and, therefore, the export dollar (mix) should become less attractive, precisely at a time when prices internationally are very depressed.”

Meanwhile, Ricardo Delgado, director of Análitica Consultores, analyzed the announcements in light of official concern about the increase in the gap and the rise in the price of the financial dollar, when a months-long period of shortage of dollar supply begins.

“The government is doubling down. This is more extreme than convertibility, in which the central bank can issue if it has dollars in reserves as a counterpart. Here they go a step further, they freeze the monetary base.”

From a technical point of view, the government is thus approaching the model of “endogenous dollarization” and gradual disappearance of the peso that Miley talked about at the time.

At the moment they are not moving toward dollarization, Delgado said, for three reasons: “They don’t have enough dollars, they don’t have the backing of the dollar issuer (i.e., the United States government) and they don’t have the backing of the IMF.” In addition, he said, “they would have to go through Congress.”

For Delgado, the government’s bet is “very strong”: to try to organize the peso world from a monetary point of view, but without putting too much emphasis on the dollar world, over which it does not have much control. “As Miley said, we are going to have difficult months ahead: it will be resolved in a complex coexistence between the peso world and the dollar world,” he concluded.

Vasconcelos also pointed out that a variable to monitor in the coming weeks and months will be the tendency of farmers to sell grain (and, thus, supply dollars to the Central Bank). This, he said, will happen at a time when nominal prices in pesos for wheat and corn are falling slightly. According to data from the Arbitration Chamber of Rosario (the main point of departure for agri-exports), the FAS price of wheat has fallen 0.4% so far in July and that of corn has fallen 3.9 percent.

To some extent, the decision that the Central Bank begins to sell the CCL portion of the dollars purchased in MULC to CCL makes a difference, as Rodriguez pointed out, it also helps to close the “endogenous” source of weight build-up from the lelic and the payment of interest from the pass.

Prior to the announcements, in an Iral document, Vasconcelos specified that interest payments had already been cut significantly, from 33.8% to 3.3% of the monetary base between last November and June this year, thereby reducing inflationary pressures. Of course, at the same time the government was forced to tighten fiscal policy.

“It should be clarified that the large burden of interests that the public sector will have to bear will not complicate the fulfillment of fiscal goals. This is not a minor issue, given the relationship that exists between the difficulties in hedging country risk and the need for the Treasury to ensure the continuity of the stock and successful tenders for each debt maturity,” the Iral analysis noted in this regard.

The purchase and sale of dollars by the government to maintain the exchange difference is a way of obtaining resources, the paradox being that a large difference plays in its favor, which it wants to reduce and even eliminate.