The official dollar market is not the relevant one. Its price is not a reference (you can only buy US $ 200 per month and with a 30% tax). The prices that we must observe are those that the government cannot control: MEP dollar and Cash with Liquidation.
This is where we will see a total jump in the dollar: it will soon be above $ 100 (and more too).
They will try to put the blame on the Coronavirus, but it should not be confused. The virus has only worsened the crisis in which we were already immersed. Argentina is a patient who was already connected to an artificial respirator before the virus erupted.
Here are each of the three reasons that will make the dollar skyrocket:
1- The monetary issue is and will be fierce
In March the money printing machine was turned on as few times in history, and the monetary base increased by 33% (about $ 600 billion). If we take the first days of April, that accumulated increase already exceeds 40%.
The government will have no choice but to continue printing because: (a) the country is in default and (b) the collection is plummeting.
(a) The country is not loaned because it is in default.
Marketing geniuses came up with inventing the word “re-profiling”, which the Macri government used to mask the start of a new default. It reminds me of Darín in “Nueve Reinas” when instead of saying that he had defrauded his partner, he said that he had made a “unilateral dividend adjustment”.
Last week we had a great “re-profiling”, when the payment of US $ 10 billion in bonds under Argentine law was deferred for one year. This is default.
The problem with being in default is that the probabilities of obtaining financing become virtually nil and the only solution is to print pieces of paper.
(b) Proceeds are plummeting.
Tax collection in March grew by 35.3%, (about 15 percentage points below inflation). With the country completely paralyzed, it is very likely that in the coming months it will continue to fall.
With reasons (a) and (b) we must be prepared to see an explosion in the amount of pesos that the BCRA will issue.
From yapa an extra seasoning is added: nobody wants pesos and they will try to get rid of them quickly (technically it is said that the demand for pesos falls)
2- Lower offer of available goods
A drop in the supply of goods and services is added to the issue due to the interruption of economic activity. If factories do not produce, supply falls.
If price controls are tightened, we will go nonstop to shortages. It seems that the price controls of the suburbs mayors and the controls of the AFIP (which closed a supermarket because there was a chicken next to a cake) are going to effectively make the shelves empty.
3- Low interest rates
The BCRA released $ 350,000 million in reserve requirements and Leliqs. Consequently, banks pay less for time deposits. Banco Nación pays 20% per year per branch and 24% per electronic channel (poor Sergio Palazzo of the Banking Union).
There is a huge amount of pesos “trapped” in the financial system. Why caught? Because a) the white channels to go to the Dollar (MEP and Cash with Liquidation) are not so easy to implement for most individuals and b) for institutions, the MEP and CCL dollar do not have sufficient volume.
Below we can see the evolution of the rates for deposits in pesos:
Source: Central Bank of the Argentine Republic.
With an expected inflation rate that (hopefully) is 40%, we have a negative real interest rate of 11%. If inflation ends up being 50%, the negative real interest rate will be 17%.
The government’s objective is that with negative real interest rates, institutions are forced to spend. But the temptation to run to the dollar, before others do, will become more and more irresistible.
The MEP dollar and the Liquidated Cash dollar began to rise in the past two weeks. They were up almost $ 10 and last Wednesday the CCL hit $ 94.7.
With this signal, the blue dollar should follow soon. Most likely when economic activity returns to normal.
There are all the ingredients to see a new run. History will repeat itself once more. The only ones who don’t seem to learn the lesson are the politicians.
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