The calm before the storm? – By Juan Carlos Sánchez Arnaud (#)

As I have been arguing: the inflationary acceleration was inevitable, it was only a matter of time, but the worst is yet to come. Towards the end of the year we will have a new wave of monetary issuance and the greater availability of money will put pressure on the dollar and on prices.

And as of the new year, inflation will increase even more if the rates of public services are made more flexible (in this case via costs). At the same time, the cost of continuing to face the pressure on the dollar with the instruments used by the Government, is finding limits and could only be corrected with an acceleration in the rate of increase of the official dollar, something that would also put more pressure on the prices.

From the economy, having made the decision to continue sliding through this “sustainable underdevelopment”, it is possible to continue buying time, but storm clouds are beginning to appear.

In any case, the key question passes through another meridian, will the weakest and most vulnerable sectors of society endure rising inflation, the loss of real income (whether in the formal economy or in retirement and pensions) and the disappearance of the IFE ?

In any case, the “rebound of the economy” for the private sector will continue to be postponed or at best will be noticed in specific sectors (such as construction) … waiting, once again, for a good harvest (which will not arrive but will will have international price compensation once again on the rise).

Wholesale prices confirm inflation acceleration

After the 3.8% rise in the CPI; 6.6% of the Basic Food Basket and 5.7% of the Total Basic Basket (CBT), yesterday it was the turn of the Internal Wholesale Price Index (IPIM), which stood at 4.7% last month. Imported products registered the greatest variation, with a monthly increase of 5.6%; in second place, primary products were located (+ 5%) and, in third place, manufactured products (+ 4.5%), although they registered the least variation between the categories, they were the ones with the highest incidence in the monthly variation of wholesale prices.

Likewise, the Construction Cost Index (CCI) advanced 3.7% (+0.8 points compared to September). By item, “materials” accelerated 2.2 points and was the one with the highest increase (no less than 7.8% monthly).

“In a context of tightening of the exchange rate and few savings instruments, part of the treasured dollars are channeled towards remodeling and home improvements, pushing up the price of materials in the construction sector,” LCG said. Far behind were general expenses (+ 2.4%) and labor (+ 0.1%).

What changed in monetary policy?

* The government in recent weeks has carried out a series of actions aimed at forcing a drop in the exchange rate in its free versions.

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* Issued more new exchange bonds —AL30 and AL35— for USD 750 MM.

* They were offered in pesos so that the international funds that were invested in local currency —Templeton and PIMCO, the most prominent— could come out via cash settlement (CCL) at low cost.

* It also announced an additional issue for another USD 750 million.

* At the same time, it placed a new dollar-linked bond with a one and a half year term for an amount of USD 1,660 MM.

* Intervened in the CCL and MEP markets, selling dollar bonds from the Sustainability Guarantee Fund of the Social Security System and the BCRA.

At the beginning of this operation, the government had a little less than USD 10,000 MM in dollarized bonds from decentralized organizations to draw on.

* And continued to sell significant volumes in the future dollar market.

* During the month of October, the Central Bank had to sell just over USD 2,200 MM to keep that market under control.

* The accumulated stock of future sales exceeded USD 7,800 MM at the end of November.

* Sales of bonds dollarized in pesos have several consequences.

* The most obvious is the consequent loosening of the CCL dollar market.

* In addition to this impact on the exchange gap, a second downward effect is added, as the sale contracts the amount of local currency.

* October was a month of contraction of the monetary base, although it continued to grow year-on-year in real terms.

* As of November 4, the base showed a month-on-month contraction of $ 97,000 MM.

* As of that day, the volume of the pure monetary base amounted to $ 2.34 trillion and was expanding 62.6% compared to a year ago. (excerpted from last week’s Report)

* Financial liabilities (Leliq and repos) had a slight contraction in the month and amounted to $ 2.48 MM.

* At the same time, a sharp deceleration of monetary aggregates was observed.

* Anyway, compared to a year ago, the M1 expands 94%.

* And the M2 is doubled.

* The evolution of time deposits suffered intensely from the rise in free exchange rates.

* Time deposits from the private sector as of November 4 fell $ 120,000 MM compared to 30 days earlier.

* Deposit rates do not look attractive in view of inflation and, especially, the rate of devaluation.

* The massive placement of debt made it possible to finance the fiscal deficit without resorting to issuance.

* Debt for $ 420,000 MM was placed.

* Discounting maturities, the Treasury obtained a net financing of about $ 250,000 MM, which allowed it to solve the fiscal red of the month and make a partial cancellation – $ 100,000 MM – of advances received from the Central.

* The primary deficit for the month was around $ 130,000 MM, the lowest monthly record of the year.

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* So far this year, the BCRA’s monetary financing to the Treasury exceeds $ 1.6 trillion.

* Finally, it should be borne in mind that the bond offering adds, at least initially, upward pressure to the sovereign risk rate.

* In our opinion, this change in monetary bias does not mean a migration towards a serious and realistic policy but rather represents the rapture of prudence and realism typical of when the cataclysm is seen closely.

* The jump in exchange rate gaps caused a rapid deterioration in a wide range of key variables, ranging from the erosion of the external current account to an incipient destabilization of the banking system.

* The disciplining of free exchange rates did not stop the outflow of dollar deposits.

* Since the PASO of August last year, almost USD 18,000 million of deposits in foreign currency from private investors have been left.

* The dollar loans accompanied them down the hill.

* This is just a desperate attempt to get to April anyway, when they discount that harvest dollars will come in.

* During this month they will be able to continue controlling the dollar by placing bonds.

* In December, debt maturities are more important and the fiscal red will be around $ 440,000 MM.

* What the economic authorities seem not to take into account is the pernicious effect on productive activity, which comes from suffering a recession that lasted, with the last two quarters marking a record contraction.

* The monetary contraction will cause a further fall in credit, which has already been declining significantly since September.

* The positive side of the monetary contraction is that it occurs at the precise moment in which the release of the confinement opens the way to the fall of the monetary demand.

* However, this contractionary outbreak will be exhausted in a few weeks, when the monstrous fiscal imbalance reaches its peak in December.

* That month the Treasury must inexorably resort to the remaining artillery of the BCRA: temporary advances for up to $ 145,000 million and pseudo-profits, for $ 405,000 million.

* In those weeks, the reopening of shopping centers, restaurants, and holidays will boost consumption and demand for pesos will precipitate, accelerating inflation.

* The risks of systemic destabilization, as a result of the combination of a flood of pesos and a simultaneous fall in the demand for money are enormous.

* It is very likely that Guzmán is already dreaming of another reinforced quarantine as of March, which will allow him to rely again on the forced increase in the demand for money and on a new banking corral, in fact, like the one that ruled this year.

It is precisely there where the crux of the matter lies: getting to April.

* Without any substantive reform in sight, and with a government that maintains the tone of hostility and contempt for property rights and price mechanisms, the current policy of hammering the dollar down only postpones and strengthens the pending crisis.

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* The reduction in the gap has not been due to any change in the fundamental situation but to a crazy placement of debt, for billions of dollars, at rates of up to 18% in dollars.

This unsustainable cost of borrowing exceeds that of countries in sub-Saharan Africa.

* In this way, the resolution of the crisis will only be postponed to explode with more force and virulence, finding ourselves over-indebted and undercapitalized.

* The new policy adopted, far from ensuring a change of air, fully illustrates the perversity of a political class willing to liquidate what remains of an emptied country, with the sole purpose of preserving itself and thus reaching the next elections.

More “cheap” financing

On a day with chiaroscuro, while China joined Germany, Switzerland, the Netherlands and France as the fifth country in the world that is managing to place long bonds with a negative rate, and with almost all of Latin America obtaining voluntary international credit at 3% per year, Martín Guzmán He had to pay a very high cost again yesterday to raise money and, at the same time, sell many reserves and bonds to prevent the Argentine peso from sinking further.

While all this was unleashed, the Minister of Economy was focused for a good part of the day on a tender for the placement of more debt, because between tomorrow and the weekend debt payments in pesos for $ 175,000 million are due, and the result obtained was certainly successful, although not so voluntary, since a decision was applied from the BCRA so that banks, as institutional investors, must guide the total stock of what they capture with a new conformation.

Thus, with 99 offers received, almost all of the main banks in the system, Guzmán went out to ask for $ 175,000 million and got $ 210,517 million, that is, $ 35,517 million more than what he had to pay in the next three days. Thus, instead of paying, it delivered new papers: 85% was in a Treasury bond in pesos (TY22) at a fixed rate of 22% as of May 2022, 12% in CER bonds + 1% (TX21) as of August 2021 and 2% in CER bonds + 1.2% (TX22) as of March 2022.

In this way, while the world is financed with a very low rate, at 0% or even negative, Argentina continues to take on debt at great cost.


Courtesy of Enrique Guillermo Avogadro

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