A small change of un-ironed clothes piles up on a chair. At first, it doesn't get in the way. Switching on the iron for such a small thing is not justified. There is a certain logic in putting off work for tomorrow. Busy with our leisure life and obligations, the pile grows. We would surely have preferred to wear that shirt that fits us so well to a meeting. But since it was in the pile, we resort to the repertoire of shirts we have hanging; because it is hard for us to part with old clothes, even if they are no longer fashionable, or not entirely suitable. After all, one changes and, if there is resistance, so does the world.
Within a few weeks, there are more clothes in the pile (or in the laundry basket) than in the closet. And the effort we refused to make in the first few days, in retrospect, would have been better done and not come to this. At the country level, the metaphor serves to illustrate a wide range of behaviors when facing economic problems. In the case of managing the monetary politics, the failure to propose a consistent policy over time has led to the need to implement measures to restrict access to foreign currency. This allows things to be put on hold for a while, but at some point everything becomes more complex and macroeconomic imbalances become more acute.
On report In the report presented below, we focus on Argentine monetary policy in the period between August 2018 and August 2020, as a prior framework for the new budgetary, monetary and exchange rate measures implemented since September 15, 2020.
The exchange market restriction measures are popularly known as “exchange rate restrictions” or simply “exchange rate restrictions”. In practice, they temporarily stop the constant drain of foreign currency, but without solving the underlying macroeconomic imbalances that cause it.
The consolidated information in our monetary report begins in August 2018, after the first semester had seen a jump in the exchange rate and economic activity was in decline. Although there were no signs of a possible return to a currency control, political uncertainty regarding the elections that would take place in 2019 took center stage. Then, the well-known story, the PASO, the currency control, the assumption of the new authorities, the pandemic and the super currency control.
The report presents an analysis of 5 main points: Monetary Base, Expansion Factors, BCRA Balance Sheet, Private Sector and New Economic Measures of September 2020. In this note, a summary.
Joint
The following graph shows that, at the end of August, the monetary base The monetary circulation is around $2,29 trillion. The specific growth for that month showed an interannual increase of 76,46%. In fact, the average weekly growth rate of monetary circulation has been 1,02%. This means that –on average- for every $100 pesos circulating in the economy, an additional $1,02 have been minted (printed) per week, in that month.
To compensate for the expansion of the base, the BCRA has recently used mainly open market operations, expressed in the use of the bill issuance mechanism. At the end of August, taking the year-to-date as a reference, the total issued for this concept was $1.056.814 million. Regarding the behavior recorded in some months, specifically March, April and July, the issuance generated by the public sector was not sterilized, due to the drop in activity originating from social isolation measures.
The expansion factors The figures that explain the expansion recorded in August 2020 compared to the same month last year are shown in the following graph. Specifically, the Public Sector generated a primary creation of money for $1.759.287 million to finance the marked deficit of the public administration. However, the total expansion of the base was $947.928 million, given that a good part of said issuance was sterilized with LELIQs ($540.028 million).
When one focuses on the BCRA balance sheet, the dynamics recorded in the analysis period between liabilities and the main asset account, International Reserves, can be observed. In the following graph, it can be seen that, until October 2019, the behavior of the variables follows the same rhythm. It is from October 19, with restrictive measures on the exchange rate in operation, that International Reserves show a stagnation, with a slight downward trend. However, liabilities show a marked increase, decreasing the relationship between reserves and liabilities.
The cumulative figure since January 2020 indicates that liabilities increased by approximately 25%, strongly driven by the placement of LELIQs, which increased by approximately 40% so far this year. As a result, in August they reached 25% of liabilities. For reference: a year earlier, in August 2019, LELIQs did not reach the 20% level.
On the other hand, when analyzing the Central Bank's reserves, so far in 2020 there has been a net outflow of just over US$2.000 billion of Gross International Reserves. However, there are many components within the gross reserves that are not actually freely available to the monetary authority.
As of August 31, 2020, the freely available reserves amounted to only US$ 2.564 million, that is, the actual dollars that the monetary authority can use. If the own reserves are taken into account, to these dollars, the gold reserves must be added. In this case, the reserves reach US$ 6.477 million. The following table provides the breakdown of total reserves.
Given this monetary panorama, the role played by the external sector, where the price of the dollar plays a determining role, cannot be ignored. For this reason, the following graph presents the main exchange rates, up to and including August 31, 2020. In it, the upward trend in the price of the currency can be observed, which has deepened since August 2019. To this end, the main exchange rates with which the Argentine economy operates have been selected, since there are approximately 15 exchange rates in the country.
Despite all the restrictions applied, the amount of dollars purchased by the non-financial private sector has been growing so far this year. Although August represented the largest drop in reserves due to foreign currency purchases so far in 2020, it does not reach the monthly levels of demand after the PASO.
As to private sector The report explores the level and evolution of loans and deposits, and the interest rate. The report notes that the gap between deposits and loans shows a growing trend, and has become more sustained since the current national authorities took office.
The only time when it narrowed was between the PASO in August 2019 and December 2019. The decrease in the gap is not the result of an increase in loans, but is explained by the drop in deposits from savers who decided to withdraw their assets from the financial system in the face of the uncertainty caused by a new change of government.
The interest rate, while it has varied over the period, has been relatively stable since March 2020. The LELIQ interest rate, which is the reference rate for monetary policy, is around 38%. This explains a large part of the increase in deposits, with the central bank establishing a percentage of LELIQs (equivalent to 79% of the same) as the minimum rate for fixed-term deposits.
On September 15, when the 2021 budget was presented, it contemplated, among other things, a real appreciation of the exchange rate. This represents greater stress for international reserves and pressures on the exchange rate. As a corollary, the Central Bank authorities decided to implement a series of measures that adjust the dollar market by prices and quantities.
Because of prices, because although there is no real devaluation of the currency, the dollar will actually become more expensive starting September 16, due to the addition of the 35% withholding tax on profits and personal property. This causes the retail exchange rate to jump from approximately $100 to about $130 and, at the same time, drives the rise of the blue dollar and the cash with settlement, as shown in the following graph.
But it also adjusts by quantity, since deductions for transactions in foreign currency have been incorporated into the quota of US$ 200 that were not previously included; such as consumption on credit and debit cards. In addition, those who receive social plans will not be able to access the official exchange rate. And the possibility of acquiring "cheap" dollars for companies to pay debts is also limited (only 40% can be done at the official exchange rate).
These measures are aimed at stopping the fall in reserves of the central bank, but only time and perspective will tell whether they really served to stabilize the country's macroeconomic variables, or whether they simply increased the size of the pile of clothes that, lying on the chair, awaits even more work.