Reports

Correct and incorrect assumptions on dollars and pesos

1st assumption. The exchange rate couldn’t depreciate because the Central Bank had dried up pesos from the market (with the Bopreals and by not lending to the Treasury). The truth is that if they had really dried up the market, the price of pesos (the interest rate) would have gone through the roof. But the opposite happened, the interest rate dropped a lot. Where the miscalculation lies: there are instruments in pesos such as fixed-term deposits, Treasury bonds, Central Bank debt or simply taking out loans, which could convert to dollars if confidence was lost. It is not only the monetary base that matters, what matters are the financial assets with which one can make a change of portfolio and run against the peso when expectations change.

Midweek 11 de julio de 2024

La inflación de julio no empezó tan bien. Es claro que junio va a darle sonrisas al gobierno. Con los ponderadores de la Nación y usando precios de la Ciudad la inflación podría ser de apenas 4.5% en junio. Pero en la primera semana de julio la inflación del consumo masivo subió a 1.6%. A esto se suma un mes estacionalmente más difícil y el tema climático (el extremo frío en buena parte del país) seguramente dejará una marca en los precios de julio. Seguimos pensando que la inflación del año va a estar entre 155 y 160%, pero eso tiene implícito una salida del cepo que genera un salto manejable de la inflación en el primer mes y algo en el segundo. Si no hubiera salida del cepo en 2024, la inflación puede estar más en torno de 140%.

BASE SCENARIO JUNE 2024

It gives the impression that the government does not plan to remove the exchange restrictions in the short term. It also seems less likely that there will be a shock stabilization plan such as the Austral or Convertibility plan. We think that exchange rate unification can occur in December. We estimate that the crawling peg will continue for the next months at 2%. By the end of the year, we see a dollar of 1,560 pesos with the unified market. The alternative we see to this scenario is that if the BCRA fails to accumulate reserves, it will be forced to let the exchange rate float before December.

A New Start for Deregulation and Micro Reforms

Everyone is waiting for the government to give some signal regarding the removal of FX restrictions. Without a doubt, that is the macroeconomic question of the hour. The uncertainty of the market hides the fact that President Javier Milei finally decided to appoint Federico Sturzenegger as Minister of Deregulation and Transformation of the State. This is something that was always in Milei’s mind, but for some reason, it took him more than six months to do it.

Midweek 4 de julio de 2024

La sangre no llega al río. En Econviews no vemos todo este nerviosismo de mercado como una crisis ni nada parecido. Nuestra filosofía siempre fue: “ni antes estaba todo tan bien, ni ahora está todo tan mal”. Es claro que hay un problema con el tipo de cambio, pero no es un tema que deba resolverse esta semana o la otra. Javier Milei es un gran comunicador, pero probablemente se apresuró el viernes a tirar la fase 2 en su entrevista y eso generó un apuro de parte de las autoridades que no cayó bien. De hecho, hay detalles que aún no se conocen. Pero nuestro análisis es que el dólar se estabiliza en niveles de brecha en torno al 50% y el riesgo país debajo de 1,500, pero queda el mercado en guardia a esperar un camino hacia la salida del cepo.

The Limits of FX Controls Are Becoming Evident

On the surface, last week ended very well for Milei’s government. After six tough months, Congress approved “Ley Bases” reform bill and the fiscal package, including the most contentious issues such as the special investment regime, the increase in income tax, the increase in the minimum rate for personal asset taxes and the moratorium and tax amnesty, which were less controversial. In addition, the high-frequency data on inflation continues to show a lot of calm in supermarkets, so that June’s CPI print, although probably higher than May’s, seems relatively calm.

FX policy, between a rock and a hard place.

Finally, Milei is getting the approval of the first laws: the “Ley Bases” reform bill, and the fiscal package. This is an important political victory, and it indicates that when push comes to shove, he is willing to compromise.  Much of the merit goes to his new Chief of Cabinet, Guillermo Francos, who proved to be a shrewd and tireless negotiator, though it is clear that Milei supported him throughout this process.

Midweek 27 de junio de 2024

Puede dar menos que 6. Nuestro pronóstico de inflación para junio es de 6%. Creemos que el riesgo de ese número es mayormente hacia la baja. Si bien las tarifas y el combustible aportan mucho más que en mayo, los precios en los supermercados vienen muy tranquilos. El hecho de que la actividad económica se recupere muy lentamente está ayudando a que los márgenes sigan bajando.

External Shocks and the FX Spread Compromise International Reserves

The fifth consecutive fiscal surplus and inflation below 5% are important points in favor of the government. In addition, the activity starts a recovery path. What is still under discussion is whether the exchange rate is appreciated. It is a question that has a thousand possible answers many of them with consistent justifications.

After a Good Week for the Government, on to a New Phase

The week ended on a positive note. Inflation was the lowest in 24 months and beyond the rise in utilities, the core CPI at 3.7% was a goal from the middle of the field. The OK from the IMF board was a given, but it is always good to confirm it. And the approval of the “Ley Bases” reform bill is the crowning of a 6-month process in which the project was reduced by 60% and where many things that the government wanted to do were left along the way. The government could not bend the will of the lovers of the status quo (politicians, businessmen and unions) on some issues. Surprisingly, it could not restore income tax for the wealthiest workers, something that lacks common sense and can generate fiscal problems.

Midweek 13 de junio de 2024

De la motosierra al bisturí. Con ley Bases y Paquete fiscal hay un panorama más claro, pero no es la panacea. Es claro que el mercado, el gobierno y la sostenibilidad de la situación económica y política descansan en la aprobación (ahora concretada) de estas dos leyes. Pero los problemas que vemos en términos de pocos instrumentos para muchos problemas no se acaban con la victoria política que de todas maneras dejó sabor amargo por la caída de ganancias y en menor medida bienes personales. Queda por ver si con la pérdida de recursos que es no tener ganancias si se avanza con la baja del impuesto PAIS o cómo se reemplaza. La otra gran incógnita es sobre las finanzas provinciales. En la macro, tenemos que ver como plantea el Ministro de Economía la Fase 2 que a nuestro criterio es una fase sin motosierra, pero con bisturí.

Base Scenario May 2024

The government does not plan to remove exchange restrictions in the short term. It also seems less likely that there will be a stabilization plan such as the Austral or Convertibility plan. We think that exchange rate unification can occur in December. For the next few months we estimate that the crawling peg will continue at 2%. By the end of the year we see a dollar of 1,560 pesos with the unified market. The alternative we see to this scenario is that if the BCRA fails to accumulate reserves, it will have to float the exchange rate before December.

Overreaction?

In the last two weeks, the financial market has faced one setback after another. The Blue Chip Swap dollar jumped from under 1,100 pesos to over 1,300. The other dollars (MEP and parallel) followed a similar trajectory. We do not see this as concerning. Perhaps more worrying is the fact that sovereign debt prices fell to the point where the country risk climbed back to almost 1,600 points after touching 1,200 or 12 percentage points. Argentine stocks, which had experienced a significant rally, also gave back some of their gains.

Midweek 6 de junio de 2024

Lo del dólar no es grave, pero el gobierno debería dar alguna señal. La suba del MEP y CCL no es un tema que haga descarrilar el plan económico. En Econviews siempre tuvimos un aumento de brecha en los pronósticos, aunque más gradual de lo que terminó sucediendo. El tema es que con el plano político complicado y el gobierno que no termina de decir cómo va a salir del cepo ni da muchas precisiones de cómo va a hacer sostenible la política cambiaria y monetaria, el mercado le cobra esa incertidumbre. Una palabra del gobierno que ayude a tener pistas puede ser clave en esta situación.

The Importance of Having a Law

The structural reforms law and fiscal packet saga seems to be ending largely because the opposition is running out of excuses not to give something to the government, which maintains a positive image of 55%. Meanwhile, the government is willing to concede almost anything to get its approval because it needs to demonstrate some degree of governability.

A second stage for economic policy, from the “chainsaw” to the “scalpel”

From the very beginning the program had two distinct phases. In the first one the main objective was to restore the basis of macroeconomic balance for which the government used a cold turkey approach, a broad- brush adjustment on the fiscal side and policies that signaled a strong commitment to fiscal balance and a return to a market economy.

Midweek 30 de Mayo de 2024

La inflación de mayo empieza con 5 o con 6. La dinámica de los precios de mayo hace que reveamos el 7% que teníamos originalmente. Hoy creemos que un número más lógico puede ser 6%, lo que implica que tranquilamente la inflación puede empezar con 5%, aunque también con 6. Lo que si las caídas de márgenes que vimos en meses pasados parecen haber terminado. En junio ya aumenta nuevamente el combustible con lo cual la baja de inflación será cada vez más marginal.

The Dollar and Activity Levels Take Center Stage

Since Milei assumed office, the economy has been moving in one direction: full steam ahead with things improving. Inflation has been steadily falling since its peak in December, the country risk has been dropping from 2,200 points and reached nearly 1,200 a few days ago, and the parallel dollars remained stable. The Central Bank saw no obstacles to lowering the interest rate because, despite having negative real rates, people continued to hold pesos (aided by FX restrictions, of course).

Lower Rates and a New Monetay Architecture

The Central Bank lowered the interest rate three times in less than a month. It went from 70% to 40%, which is quite unusual. Especially for a situation where the volatility is not what it used to be, for example, in June 2022. Inflation is decreasing, and so are expectations. However, 40% implies a negative interest rate under all circumstances. As we mentioned on previous occasions, the negative rate is possible because there is a strict currency control in place, indicating that despite libertarian philosophy, there is no rush to exit. The rate cut aims to achieve two important things: stimulate credit to help economic activity and reduce endogenous money issuance, meaning the interest on repos.

Base Scenario April 2024

It seems that the government has no plans to remove FX restrictions in the short term. It also seems less likely that there will be a shock stabilization plan such as the Austral or Convertibility plan. We changed the exchange rate unification that we had projected in July to December. For the next few months, we think that the crawling peg will continue at 2% until the harvest ends and then there will be a slight acceleration. By the end of the year, we see a dollar of 1,600 pesos with the unified market. The magnitude of the FX spread will depend on whether the government relaxes the restrictions on the Blue-Chip Swap or not. In the first case it can rise more than in the second.

Very Good First 5 Months, Now Policy Will Be More Challenging

In the first months of Javier Milei’s economy, everything went as planned. The efficient management of the government deactivated the risk of hyperinflation in the context of one of the worst inheritances in memory. The data show that the country risk fell by half, Argentine stocks measured in dollars skyrocketed and public opinion bore a severe recession. At the macro level, the Central Bank bought more than 15,000 million reserves and the Treasury had a first quarter of financial surplus with a high probability that we will see a fourth month in April. Inflation, although still very high, reached lower values than we estimated at the beginning of the year. The realignment of relative prices is not over, but it is underway. The business community accompanied and Wall Street too, including businessmen like Elon Musk.

Midweek 9 de Mayo de 2024

La inflación sigue bajando en los próximos meses. La inflación de la Ciudad de Buenos Aires marcó 9.8% en abril. Nosotros tenemos para la que publicará el INDEC la semana que viene un 9% con riesgo a la baja. Usando los ponderadores nacionales para los precios de la Ciudad (un supuesto razonable, pero no perfecto), la inflación sería de 8.2%. Mayo va a tener una inflación todavía menor por dos razones. La dinámica es claramente mejor y el cambio de estrategia de precios regulados (posponer suba de impuesto a combustibles y no ajustes por inflación) van a ayudar. La discrecionalidad de las medidas no gustó, pero eso es harina de otro costal.

Support for Reforms in the Lower House, More Rate Cuts and Less Subsidy Cuts

Last week was a good one for the government’s agenda. The most important thing was “Ley Bases” reform bill’s approval in the Lower House. As expected, it was a bit bumpy, but it worked out. The numbers for the Senate are not entirely clear, but our view is that there is a better chance of approval than rejection. But politics is much more difficult to forecast than economic variables. If approved, there will be good news on the fiscal side with the reestablishment of income tax, tax amnesty, moratorium and a new personal property tax scheme in which many taxpayers can advance payments for the next 5 years. There is also an adjustment in brackets for single-tax payers, a lifeline for those self-employed workers who were shaken by inflation.

Midweek 2 de Mayo de 2024

Tasa baja, cepo largo y “deme 2”. La baja de tasas tiene dos objetivos básicos. Reducir la carga de intereses del Banco Central y el Tesoro y estimular el crédito. En la primera de las intenciones, es claro que Milei tiene una idea fija con la cantidad de dinero de la economía y para la tesorería esto reduce el déficit total. Con el crédito más barato el gobierno piensa aumentar el consumo y darle capital de trabajo a las empresas a tasas negativas y eso puede ayudar a salir de la recesión algo más rápido. La contracara es que el levantamiento del cepo quedará para más adelante. La tasa negativa es compatible con represión financiera solamente. Esto también nos lleva a deducir que hay baja probabilidad de evitar que el peso se siga apreciando y así lo hizo saber el equipo económico. El problema es que en general esos episodios no son sostenibles. Se le puede echar la culpa a algunas empresas por los márgenes elevados, pero al final la apreciación es un problema macroeconómico que puede desincentivar el ingreso de capitales sin cepo y sin dudas puede ralentizar la reactivación.

Cautiously optimistic, with a few wrinkles to iron

The government is approaching critical times as Congress is starting to debate the “Ley de Bases”. The bill includes a fiscal package as well as some structural reforms that should help to improve productivity and increase investment and growth. This is a tone down version from the law that was sent to Congress in February and then withdrawn because the government considered that Congress was softening it too much.

Cutting Rates: A Bet in Many Directions

The government decided to cut rates by 10 percentage points and now the monetary policy rate (the Central Bank’s reverse repo rate) is 60% APR, an 82% effective rate. In our base scenario we expected a loosening in monetary policy, but perhaps in June after a more consolidated decline in inflation. Last week’s decision was a surprise, but not a storm on a sunny day.

Midweek 25 de Abril de 2024

La inflación va para abajo, aunque nos cuesta ver el 5 y pico del BCRA. Los datos de alta frecuencia nos siguen mostrando bajas en precios de productos de consumo masivo. Esto nos hace sostener la inflación de 9% para abril y algo más bajo para mayo. En la presentación del vicepresidente del BCRA se marca que el próximo mes la inflación sería del 5.8%. Nuestra visión es que eso es muy difícil, a menos que se decidan aumentar subsidios al transporte y tomar otras medidas que comprometen el equilibrio fiscal. La inercia está agachada, pero no ha desaparecido. De todas formas, cambiamos nuestro escenario a una inflación de 185% para el año.

La inflación juega a favor en abril, pero no cantemos victoria

Los datos de alta frecuencia que medimos en cadenas de supermercados del Gran Buenos Aires (alimentos y productos de cuidado personal) nos mostraron una deflación por primera vez desde que hacemos este ejercicio. Hay muchos peros porque nuestra canasta no es idéntica a la del INDEC y la muestra de comercios es más chica, pero aún así en los últimos meses los alimentos que medimos tuvieron trayectoria bastante similar a la de los subíndices de alimentos del índice de la Ciudad de Buenos Aires y la del INDEC para el Gran Buenos Aires.

Midweek 18 de Abril de 2024

Inflación: estamos mal, pero vamos bien. El 11.01% de marzo fue 1 punto más bajo que nuestra estimación y 1.5 puntos por debajo del REM. Los precios de los bienes siguen muy tranquilos y esperamos que la inflación de transables vuelva a caer en abril. Lógicamente pegará fuerte el precio del gas y algunos otros servicios. Pero en la coctelera del IPC es muy probable que nuestro número original del 10% para este mes termine quedando grande. De manera que vemos el escenario más probable que en abril la inflación se acerque al 9%. Sigue siendo escandalosamente alta, pero al menos la trayectoria es mejor a la esperada.

Lower Rates and Gradual Lifting of the Restrictions

The Central Bank lowered the monetary policy interest rate by 10 points, from 80 to 70% annually. Now the banks began to pay time deposits of around 60% annually. There are arguments to lower the rate. The first is that market rates were already very low. The government knows that the rate has to be higher than the projected devaluation and lower than inflation to maintain appetite for the peso, although the equation is less simple than it seems.

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