Times change, but the problems remain the same. Discussions about the exchange rate and the spread go back a long way, with a wealth of experience to learn from. In Argentina, we surely have more knowledge on these issues than any other country, although it seems that we haven’t learned much. Instead of looking for in-depth solutions using known strategies, we have generally opted for shortcuts to get out of the quagmire of lag and the exchange gap, when the solution lies in an economic program to tackle the problems. underlying.
The question in the air is whether the exchange rate is lagging or not. Probably not in traditional terms as in the later stages of the tablita Fixed devaluation schedule of JosÃ© MartÃnez de Hoz in 1980 or in the last period of convertibility or the end of the presidency of Cristina FernÃ¡ndez de Kirchner. In those years, there was no doubt that Argentina was a dollar-expensive country and in all of these cases the end was predestined – a devaluation to restore a competitive exchange rate. Just like today, the ministers of the day said that they were not going to devalue but that the needs had to and in the end they succumbed to the pressures of the market.
The current situation is a little different. When you analyze the actual level of the exchange rate (i.e. corrected for inflation), which is a way of measuring whether the country is expensive or cheap in dollars, a shift in the exchange rate doesn’t is not obvious. The exchange rate in real terms is around the average of the last 30 years, so our official dollar is apparently neither cheap nor expensive. In addition, the economy has a more than acceptable trade surplus of around US $ 14 billion, which does not normally occur when the exchange rate is below competitive levels. A possible reading, therefore, is that the official exchange rate is balanced, which would make exchange rates parallel like the cable dollar (contado con liquidation, or CCL) very high.
However, at first glance, this does not necessarily appear to be the case. Equilibrium exchange rates is a theoretical concept that only makes sense in a long-term analysis. In the short run if the cycle is complex, a country may need an exchange rate higher than equilibrium and lower if the cycle is more benign. The problem is that the exchange rate not only balances the trade figures (which depends on whether a country is expensive or cheap in dollars) but mainly serves to balance the balance of payments, including inflows and capital outflows.
The current real exchange rate would be reasonable if economic conditions were reasonable, but they are not in Argentina today. Net reserves of around US $ 6 billion are unreasonable when at least US $ 35-40 billion is needed. A country risk of 1,600 points implying that the government does not have access to external financing or to private sector credit for investments is not reasonable. It is unreasonable that MSCI (Morgan Stanley) classified us as âStand Aloneâ, a category similar to Lebanon, a country that is imploding. Nor is it reasonable that an economy should impose supercepo capital controls and tolerates an exchange rate differential of 80% to avoid losing its few remaining reserves.
Since conditions are unreasonable and there are times of financial turmoil, in which the country experiences a severe capital flight, the official exchange rate is not enough to balance the money markets as a whole. In other words, you could say that the exchange rate is correct for business operations but low for financial operations. The problem is that in general there is only one exchange rate for the two types of transaction and this in practice and that in the short run a unified exchange rate tends to be determined mainly by financial flows. and through trade to a lesser extent. This does not only happen in Argentina – it is a universal phenomenon.
In Argentina, the solution found to deal with this dichotomy was to adopt two exchange rates. On the one hand, we have the official dollar, which is used mainly for exports and imports and very few capital transactions (a commercial dollar) and on the other hand, the CCL, used for savings and capital movements ( a financial dollar). This reality cannot be maintained for long, especially with an 80% spread in which there are huge incentives to seek mechanisms to buy dollars at the official rate and sell at the parallel rate. This is the reason why these patterns do not last and after a certain time a unification of the foreign exchange markets is sought or at least a significant reduction of the gap.
The big question is how, when and with what exchange rate the market can be unified (or at least the spread considerably reduced). In Argentina, the exercise is much more complicated because inflation is around 50% per year and a misstep in closing the gap could lead to a further surge in inflation, as has happened. often produced.
The ideal would be to lower the parallel dollar, but unless there is a significant change in country risk, international reserves, interest rates and confidence levels, this will be difficult to achieve – this looks like an impossible mission. Experience shows that in most cases unification is closer to the financial rate than to the official rate.
The remaining options would be an exit in the style of then-central bank governor Juan Carlos FÃ¡brega in 2014 – that is, a devaluation of 15-20% to close the gap – or to accelerate. daily depreciation rates before inflation for several months until a decline in the exchange rate lag can be observed. Both options are risky because they could increase inflation without closing the gap.
There are no simple alternatives. Continuing the current chasm is a recipe for continuing to lose reserves and harden the cepo exchange controls, thus threatening economic recovery and halting investment. Devaluation or accelerating depreciation of the currency without an economic program could result in price increases neutralizing the effects of the improvement in the exchange rate rather than helping to close the gap. Generating a wait change to lower CCL does not seem viable at this time.
Unfortunately, I don’t have a recipe for solving this problem and I don’t believe there is anyone who does. What is certain is that without a comprehensive program to improve confidence, reduce the budget deficit, improve reserves and be implemented under a deal with the International Monetary Fund, the exchange rate problem will get worse instead of resolved.