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At least… zigzag

17-07-2017

Resumen Ejecutivo

Monetary tightening and informal economy

Dollar…¿floating between a floor and a ceiling?
From “3 each 4” till strong indebtedness
Micro strategies to face Central Bank… virtuous and others
Shuffling 2018

Facing a high and increasing demand of dollars (in the first months of 2017, argentines bought US$27 billion for tourism and savings), dollar value is defined by offer and sell/buy graduation in the exchange market that result in the coordination between a Treasury that is falling into debts in dollars in order to finance a big pesos gap and the Central Bank which has an extremely ambitious disinflation objective. In the mid time, while there is still available financial resources, the exchange rate has ground and ceiling due to the decisions made by the Treasury and BCRA. In mid-April, with a dollar at $15,2, Central Bank decided to explain its Reserve’s goal and started buying dollars through public banks by issue pesos that most of them would later be sterilized. At $17,35 , in the first June’s Thursday, there was a sign that the ceiling was near and this stimulated private offer taking the rate to $17,12 (by the end of this report).

Both ceiling and floor depend on a policy decision that could be change. Although exchange moving is not necessary neutral in terms of economy development, even more in the middle of a campaign witch result is closely following by markets which look governability (measured in terms of Buenos Aires results) rather than fundamentals and taking into account Lebacs maturity concentration.  Meanwhile dollar moves 20 to 25 cents a day, there is not enough interest rate to coordinate demand for pesos, and when dollar is stable (o falling like in the first 2017 months) a 2% monthly interest rate is more than enough. But the recent dollar movements and content uncertainty is in the middle and try demand for pesos in front of a Lebac maturity equivalent of 60% of the monetary base. Tools to coordinate demand for pesos are ready, but will depend on a policy decision. 
Must be remembered that the $9,7 received by the new government is now equivalent (adjusted by cumulative inflation and discounted USA CPI increase) to one of $15,4. In other words, at $17 the photo shows a 10% jump in competitiveness since November 15. Is it true that in multilateral terms situation is a bit different (20% higher) because of the real value (R$4,25 in the first month of the actual government compared with R$3,2 nowadays), but this only impact in bilateral trade with Brazil that represent less tan 20% of total exports and a little more than a forth part of the imports. 

The jump in Exchange rate helps to improve Central Bank Balance sheet and to close 2017 treasury financial program. With remunerated liabilities (Lebacs and Pasive repos) for $999 billion and an average interest rate near 25% annually, passives yield gets up to $250 bn. With assets in dollars (Reserves plus Treasury bonds) for US$95 millions, and yield in dollars lower tan 1.5% and a dólar at $15,8 at the end of 2016, cuasi fiscal déficit dependes directly from the value of the dollar: each peso the currency rise, the balance sheet result improves $95 millions. In other words, the dollar inrease from $15,2 in april to $17 nowadays reduce 2017 cuasifiscal deficit from $200 billion to $40 billions. 

But the increase in dollar is not even neutral in fiscal terms. It is true that, ceteris paribus, the treasury gets more pesos for the same dollars, the $1,5 jump in the currency allows the treasury to save US$1.000 million to fill 2017 gap. But its still true that the Nation balance sheets not helped b  , el salto de $1,5 en el tipo de cambio le permite al Tesoro un ahorro de US$1.000 millones para cubrir la brecha remanente de 2017. Pero también es cierto que el balance del sector público no se ve favorecido por una devaluación, más bien al contrario. Por un lado, la deuda en dólares representa el 80% de la deuda neta de tenencias intra sector público y el 100% de la deuda de corto plazo (US$15.000 millones en Letes), por lo que un aumento del tipo de cambio se ve reflejado en una mayor carga de intereses y vencimientos de capital. Por otro lado, tampoco la composición de ingresos y gastos ayuda a corregir el resultado primario, teniendo en cuenta la baja en las retenciones a las exportaciones, y que la cuenta de subsidios se arma con costos de los servicios públicos en dólares y tarifas en pesos. Esto último fue en gran medida lo que explicó que, en 2016, a pesar del salto significativo en las tarifas, la cuenta de subsidios escalara no sólo en pesos, sino también en porcentaje del PIB (de 3,2% en 2015 del PIB a 3,6% en 2016). 

The competitvenes picture, depends directly from the devaluation pass trought. Without tarifs since may, june cpi has been reduce to 1,2% montly in the newly National index (1,3 monthly in core cpi index) meanwhile wholesale prices has accelerated to 1,9%. July cpi inflation Will return to 2%, only increase announced (prepaid medicine, gasoline, cigarettes, expenses and maid wages) added 1 p.p. to the month data. Tourism seasonality plus dollar increase, more than compensate anticipated clothing sales. In august prepaid medicine again and taxis (the last only in City of Buenos Aires), and in October tariffs again (Gas per pipes, Electricity and Transport). The year Will finish with and inflation near 23%, similar to our first scenario one year behind but with an economic growth much lower, specially in consumption. 

Cost and prices race in an economy with inflationary inercia, and that continous being to close, with a small financial system and with a very high tax burden, has micro path that in the cojuncture deviate the economy from the work other countries more normal work. Some examples came from the consumption dynamic with winners sectorss (motos, cars, real state, and some electroproducts) where local pricces has been cheaper in dolars and with avaible credit, and looser sectors (textiles, shoes, toys, foods and other segments of massive consumption) where try to compensate the fall in quantities with prices increases. But even inside sectors, not all the players are in the same situation, informal economy, imports, robotizarion and consumer disintermediation trought electronical channels and others like direct sells to handle the costs are the principal mechanism behind a price discrimination with relevant impacts in terms of share. That in a context where consumers try to maximize income purchasing power substituing consumption at the same time increase purchasings outside the country and increase savings in dollars (a portion goes to by letes), or go to Central Bank liabilities that for definition are not lendable capacity.

A paradox is that monetary policy transmission channel in a context where companys fix prices independently trying to  top ut a limit to markups falls in a strong cost burden and where discrimination mechanism (discounts and promotions) that had been generalized during 2016 are showing decreasing yields. With results not necesary virtuos in terms of macroeconomic fundamentals. As we mencion in the last monthly report, coordinate the correcciion of the relative prices strong distorsion is not an easy work, and requires a coordination between fiscal, monetary and energy polices in a context where politics require results facing October. Results that in 2017 has been being to small and extremely bias to public works.. 

To close, markets look on October 22 with a stop at the PASO (Open and Simultaneously Primary Elections) and measure governance based on the result of the province of Buenos Aires, believing in the Government 2018 agenda which include labor, fiscal, pension and political reforms simultaneously to the fiscal, tariffs and inflation path. In some way markets connect the agenda viability to Cambiemos wins the two senates in Buenos Aires Province. Even tough, this occur or not, could have impact in bond and dollar prices and vice versa until the new story would be rewrite in a world that will surely remain liquid, pending and indispensable reforms require the construction of consensus and the coordination of measures much broader than those seen so far. 

Last surveys results detonate in the Government the installation of different short-term devices to push consumption and break parity. The offer of 50% discount with BAPRO credit cards and the $50 billion line from ANSES for soft loans to welfare beneficiaries (AUH) show the difficulty in Argentina of going through the odd year with the even year same agenda. Finally, ... the zigzag appeared; The handling of the dollar should also enter in the zigzag.

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