Why do we talk about exchange populism?
A few days ago the so -called phase 3 of the Government Stabilization of Javier Milei was presented. Undoubtedly, political communication has allowed, through a great “media show”, to show a collapse as an achievement.
Reality, as always, has less smoke than the official story. When we say that the plan failed, we mean that the stabilization strategy based on the displacement of the fixed exchange rate to decreasing rates, first 2% and then 1% did not achieve the convergence of the inflation rate to said path. On the other hand, the program gender a strong inflation in dollars that began to deteriorate the result of the current account. All this within a strong restriction to the capital account (CEPO) used to delay the outcome, which finally ends up, during the months of March and April with a jump in the exchange gap.
If we did not change the course, we were direct to an inflationary acceleration, the beginning of a new recession and a balance of payments with the consequent non -controlled jump in the devaluation rate.
IMF’s salvage leaving the lack of ability of the authorities to manage a consistent program that allowed to stabilize the economy permanently.
Luckily, this was left behind. What is the new stabilization strategy?
In the first place, it would be right to assign a fantasy name to the new stabilizing sketch. Taking into account their objectives, we have no doubt that the best way to call it would be “exchange populism.”
Let’s clarify, so that the reader does not believe that there is animosity in the name. The new plan was shown as an exit of the stocks when in reality we have not left it definitively or completely and we do not have a floating exchange rate in strict terms. In other words, it was a misleading announcement since it was a partial uprising of certain exchange restrictions, which looks as “non -permanent.”
In order not to be redundant we can summarize the measures synthetic:
-Maintenation of the stocks for companies, partial elimination for natural persons (exchange populism).
-The differential exchange rate is maintained (with an important 30%surcharge) for purchases abroad and tickets, even for natural persons.
-The “parking” is eliminated in the financial operations of arbitration of public titles through which currencies are marketed (the so -called CCL and MEP dollars).
-The “blend” dollar (a kind of “soy dollar” of the government) is eliminated, but the restitution of transitory decreased withholdings is announced.
-The flotation band between $ 1000 and $ 1400 is established, where the exchange rate can float (a “dirty flotation” that we will call “flotation in the bathtub”).
-The new bopreal (more BCRA debt in dollars) are issued and bank lace are uploaded.
Let’s see how the band system works:
The fixation of an exchange band between 1000 and 1400 allows the economy to use two monetary systems, according to what happens with the nominal exchange rate value. If the price of the dollar climbs the 1400 or falls below 1000 the system works as a fixed exchange rate. On the other hand, while the price is maintained between these values we will float, the system functioning as a flexible exchange rate system.
Under the latter, from the theoretical point of view, the trajectory of monetary aggregates is relevant, since some of these works as a nominal anchor. In this regard, the monetary base has been growing at interannual rates of 123%, 96%M1, M2 to 84%and M3 to 82%, it would be desirable that while we are here the monetary aggregates slowly slow down. However, this is not conclusive to determine the inflation rate that is undoubtedly more complex (remains a monetary phenomenon) and includes the demand for other financial assets (Bopreal, Lefis, Lecaps) that compete in liquidity with money and consider other elements of replacement over time.
When the market forces want to take us out of the band, the nominal anchor will be the fixed exchange rate, buying 1000 and selling to 1400. But when we reach the upper limit of the band, we will start selling reservations and will be the beginning of the end of the plan.
The question of the program consists in which prices disciplining driver will be. The 1% crawling may no longer continue with the slowdown in inflation and it remains to be determined if the breadth of the band does not determine implicit inflation that tries to locate prices at a value consisting with the upper limit of it. In other words, the plan results in a contingent nominal devaluation
Let’s make an effort to explain it better. The price training mechanism, according to expectations should include the probability that at a given time the running market on the upper limit of the band and validates major prices. For this reason, we believe that during the next months we will observe a strong volatility of relative prices adjusting the possibility of reaching that limit. The exchange band, which includes a covert devaluation determines an uncertain path on the nominal exchange rate and could generate a transfer at prices that will depend on where the real exchange rate is located. In other words, inflation will stop lowering to be at higher levels of those observed until February to compensate for uncertainty about the exchange rate between bands.
In the new stabilization system, exchange stability in the face of the temporary trajectory of inflation is privileged. That is, for the government, it is crucial to keep the nominal exchange rate, even at the cost of sacrificing some inflation and maintaining the exchange delay. (exchange populism).
To go to the point, let’s go to the weaknesses of the program. From the monetary theory we can affirm the flotation itself is not relevant. A monetary regime is not inflationary per se, however, there are some distortions that would be preventing the economy from reaching the equilibrium exchange rate.
Distortions:
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The fact that companies continue within the stocks implies that the demand for stock of dollars is not part of the determination of the current market price.
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This unpeded demand would determine that the current price of the dollar is lower than the future price, inducing an intertemporal replacement argument. (damage of the current account).
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The highest interest rate introduces additional distortion by keeping high, in transitory way, the demand for weights and financial assets.
These distortions are not the only ones and converge with other errors and horrors of institutional and fiscal policy:
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The CEPO was partially raised through administrative measures of the Central Bank and Arca, this last agency did so through an “exception”, so there is no guarantees that when they run on the band there is no temptation to re -squad.
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The discussion about the independence of the BCRA has been absent. Without independence, the commitment not to finance the Treasury is more like the promise of a politician than to a real restriction.
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Likewise, it could also appear, in an eventual reform of the Organic Charter of the Monetary Authority, the explicit prohibition of establishing this type of measures incompatible with our Magna Carta, but there is not even talk about the subject.
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Nor has it sought to create cutting jurisprudence that declares the unconstitutionality of exchange restrictions that governed for more than 9 years for natural persons, since they remain in force for legal persons, plus surcharges to the purchase of passages and tourist expenses abroad for all of them.
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Nor was it proposed to aggravate the penalties set to the officials that establish in the future this type of unconstitutional restrictions on freedom and property.
Finally, and not to get bored or worry more:
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A non -less issue is the exclusion of capitalization of the interests of the LECAPS in the calculation of the financial result. While accounting could be accepted, it should be clear that it is nothing more than a makeup that hides a negative financial result (a gadget of the so -called “creative accounting”), which will have to be financed, which is generating a dangerous debt stock. As a reference, considering the capitalization of interest of these instruments, the financial result of 2024 was negative at $ 12.29 billion (almost US $ 10.6 billion at the current exchange rate).
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The services of this bulky treasury debt will be increased in the future, both by the increase in the interest rate of the titles and by the incidence of the increase in inflation in adjustable bonds, which will imply the aggravation of what is announced in the previous point. It is expected that the greater the deterioration of the variables, the rates will be increasing.
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This situation will cause aggravation of exchange delay, greater deterioration of current account and commercial balance.
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Finally, all this leads to the agents to have a conviction that they are facing a temporary stabilization plan, so they will mostly seek only transient businesses (Carry Trade), in which after a certain and short period of time making their profits, making them again in hard currency, which will cause the acceleration of the end of the plan.
To conclude. The current euphoria may not last long. It is likely to reach the October elections, but after that we will be in front of a cliff. Positions will be disassembled to take them again in dollars starting a speculative attack on BCRA reserves.
There are still possibilities to correct monetary course and stabilize permanently. Today it is necessary more than ever, the independence of the BCRA, to release the stocks to the companies, to leave the stocks by law also providing legal certainty with jurisprudence that declares its unconstitutionality and stop floating in the bathtub, to float seriously.
* Mariano Fernández, @calixtoliber, economist, Professor of International Monetary Economy, CEMA University
** Adolfo Paz Quesada, @dofipaz, Lawyer, Professor of Constitutional Law, UBA.
The points of view of the authors do not necessarily represent the position of the University of CEMA or the UBA.
By Mariano Fernandez and Adolfo Paz Quesada
