Bloomberg.- Argentina experienced a real storm in 2018, with the economy in recession, the currency with the worst performance in the world and the rescue of the International Monetary Fund. In this year of presidential elections, key to the future of the country, the government and the Central Bank are already armed to defend the exchange rate peace observed since October.
“The election is the main source of risk for Argentina this year,” warns Pilar Tavella, economist for Argentina at Barclays, in a report to clients. The Government’s challenge is, from now on, to perpetuate calm in the face of any turbulence that could compromise Mauricio Macri’s chances of being re-elected.
In Argentina, in years of presidential contests, savers and companies tend to protect themselves from political risk by buying dollars, which entail devaluation pressures on the peso.
At the end of June, Cristina Kirchner is expected to announce whether she will run as a presidential candidate. “If the polls show the former president as competitive, we can expect a debilitating pressure on the exchange rate,” writes Tavella.
1. High real interest rate
The Central Bank maintains since October a strict control of the amount of money circulating in the economy, causing an unprecedented rise in rates in pesos. The idea is to displace the dollar from the preferences of investors, by encouraging the positioning in assets in local currency. Argentina’s instruments pay 30 percentage points above the expected inflation, according to Banco Itaú.
“It is a real interest rate in pesos that is at historic highs and that allows the exchange market to stabilize,” says the economist of the Brazilian bank in Argentina, Juan Carlos Barboza. The nominal interest rate has already dropped by almost 16 percentage points from October 8th highs, to 57.61%, but maintains its value in real terms in the face of falling inflation.
2. “Ultracompetitive” weight
The peso is almost 50% weaker than it was a year ago, allowing Argentina to reverse outflows of foreign currency adverse to its economy.
The improvement is perceived above all in the demand for savers’ dollars and in the trade balance. The difference between purchases and sales of dollars for savings of Argentines was reduced in November 2018 to US $ 107 million, from US $ 2,441 million a year ago. During this period, the commercial balance of goods and services became positive at US $ 979 million, compared to a negative balance of US $ 1,494 million.
3. Ammunition in futures
The Central Bank completely disarmed all the position it held open in dollar futures in the market at the end of 2018, from the nearly US $ 3,600 million it had on September 28, as expressed in the agreement signed with the IMF. From this, the president of the agency, Guido Sandleris, could sell dollars and build a position again to discourage runs against the local currency.
“It’s a good resource because it’s a way to intervene without using reserves,” says Daniel Chodos, a strategist at Credit Suisse in Argentina. “But this can have a monetary effect and, if the amounts are large, also on inflation.” The maximum limit that is authorized to be sold in future BCRA is US $ 1,900 million in June.
It is part of the strategy of Gustavo Cañonero, first vice president of the BCRA, “to have firepower,” says Alejo Costa, head of strategy at BTG Pactual in Argentina. “It is the best that they can do”.
4. A help from the Treasury
Finance Secretary Santiago Bausili said in an interview with Bloomberg News last week that the Treasury will have a surplus of dollars this year and that it will exchange them for pesos, which will provide “one more element” for exchange stability. It is difficult to estimate the amount of sales of Treasury dollars “because it will depend on the composition of debt between dollars and pesos and energy payments, which are the main uses of state dollars,” he added.
The Treasury will be in 2019 a key player in the market, which will help generate the necessary supply of dollars to supply the demand of savers and companies that can