In a link between my personal and blogging life a friend departed on a business trip to Argentina the weekend before last and she asked what I thought of the economic situation there? Below is how I replied.
The story starts yesterday with this from US Treasury Secretary Scott Bessent
This is quite rare and from something most people are not aware of which are FX Swaps between central banks.
To that end, today we directly purchased Argentine pesos.
Additionally, we have finalized a $20 billion currency swap framework with Argentinas central bank. The U.S. Treasury is prepared, immediately, to take whatever exceptional measures are warranted to provide stability to markets.
Will it work? No ( in the end it is never enough)
Also Argentina has raised interest=rates too. I know this because the interest-rate is no longer on the front page of the BCRA website. If they had cut it they would be telling us.
Will it work? No ( in the end it is never enough)
The Problem
The Argentine Peso keeps falling as when Javier Milei became President he changed the exchange-rate from 350 to 800 versus the US Dollar. It is 1450 now. Also we see that what used to be called the black market and then the grey is now blue as the Dolar Blue has at times been quite different from the official one which is a really bad sign. 1475 yesterday is not so bad but nonetheless 25 different.
Inflation
Officially 33.6% and predicted to fall to 21.9%. If you look at the Peso it has fallen some 32% on the last 6 months and if you assume a 0.5 impact on inflation that gets you to around 37% that would be really bad because it has been a Milei success up to now.
By the way their calculation to 0.1% is nonsense sometimes the numbers are barely accurate to 10%.
Bringing things up to date
It is revealing that in less than a fortnight a lot has happened. In fact by the Wednesday I has messaged her to say I was right about the US currency support quoting this from the Buenos Aires Times.
“We are working on a US$20-billion facility that would be adjacent to our swap line, of private banks and sovereign wealth funds that I think would be more aimed at the debt market,” he told reporters in Washington.
Bessent added that he had spent “weeks” working on the private-sector solution to Argentina’s upcoming debt payments, which would come on top of the US$20-billion US swap line the US Treasury recently set up.
The reason I was so confident the original US $20 billion would not work was based mostly on the fact that you are comparing a stock with a flow which in theory is the balance of payments deficit and in practice sales of the currency. Regular readers may recall how quickly the debate shifts to how long will reserves last even for countries like Russia with lots of them. So the money was being used up at a rapid rate.
I can now update on the interest-rate as the central bank or BCRA tells us that if you use APR private-sector banks are offering 52.8% (TAMAR) and 49.8% (BADLAR) so interest-rates are in reality approximately 20% higher than the official 29% in reality.
Argentine Peso
The official exchange-rate is at 1488 Pesos to the US Dollar and is showing all the signs of heavy foreign exchange intervention as it was “Solid as a Rock” as Ashford and Simpson would say except around 4 pm yesterday when presumably the central bank buyers went to the coffee machine. According to Valor Dolar Blue this is the real situation.
Blue Dollar rose 0.32% and closed the day at $1,550.00. The gap with the Official Dollar rises to 1.9%.
So in spite of all the support we see a situation described by Billy Joel.
But you will come to a placeWhere the only thing you feelAre loaded guns in your faceAnd you’ll have to deal withPressure.
A major factor here is that the promised support from the US is fine in the short-term but minds very quickly turn to what happens next? In that world Argentina is still short of foreign-exchange reserves and now owes money to the US as well.
Number-Crunching the foreign-exchange reserves
This was interesting from Armando Sanchez
The BCRA only has 188 million Dollars available. The rest is money from the IMF to pay the IMF’s maturities, the China Swap, and the remainder belongs to savers in the banks. If it hadn’t been for the 400M from the Treasury today, the BCRA would have no way to contain the Dollar.
As was the reply from Brad Setser.
interesting — when i net out the gold, the domestic fx deposits and the $13b in CNY still at the BCRA I get a slightly number (single digit billions) but I wasn’t setting aside anything for IMF payments (using the last disclosed gross reserve total of $41.3b). would be interested in the math.
Before we get to my estimate we see two problems. Firstly if you borrow from the IMF then at some point you are supposed to repay it. Secondly Argentina previously borrowed money from China as well which usually comes with a whole range of commitments. So the claimed US $41.3 billion of reserves comes down to not very much and may even be effectively negative.
Also let me remind you of an issue I raised back at the beginning which is that success requires Argentines to actually want their own currency. If this from the Financial Times is any guide then there is a way to go on that.
“The central bank has been unable to attract sufficient private supply of US dollars to service and repay external debt,” said Thierry Larose of asset manager Vontobel.
The economy
It looks like there is some economic growth.
Economic activity grew 0.3 percent from July after three straight monthly contractions. From last August, the economy expanded 2.4 percent, just above the 2.3 percent median estimate of economists, according to government statistics published Wednesday. ( Buenos Aires Times)
Although with all the turmoil are the numbers accurate to 0.3%? Also I note that forecasts of growth of above 5% have become 3.9%.
Comment
Once one boils all of this down it comes to trade. This s not helped by the fact that trade figures are notoriously inaccurate.For example my home country the UK decided in the 1990s that the 1967 currency devaluation was not in fact necessary as the numbers were revised. So my final point to my friend was to refer to what I posted on here on the 22nd of September.
What is needed is for the time to be used to strengthen the Argentine economy and exports in particular.
Putting it another way the interventions need to buy enough time for the economy and in particular trade to change. Possible routes are firstly this.
The administration, seeking to ease a surge in domestic beef prices, is raising the tariff-rate quota for Argentine beef fourfold to 80,000 metric tons a year, a White House official said Wednesday. The news was reported earlier by Politico. ( Buenos Aires Times)
The rise in the price of beef is a boon for Argentine farmers. Also the ability to produce shale oil and gas.
YPF president and CEO Horacio Marín says a recent agreement between Argentina’s state oil firm and Italian giant Eni could lead to total exports of some US$300 billion over the decades, as well as the creation of 50,000 jobs. ( Buenos Aires Times)
Let me finish by reminding you to never believe anything until it is officially denied.
Economy Minister Luis Caputo says current exchange rate regime “will remain exactly the same” in an attempt to dispel fears of an imminent post-election peso devaluation. (Buenos Aires Times)
