The exchange discussion in Argentina tends to confuse the roles of the dollar. The dollar refers, on the one hand, to the exchange rate,that is, the relative price of exports in relation to imports, to price competitiveness and trade balance. The terms undervaluation and overvaluation are related to this role, when this is what we think of when we say that the dollar (or the country) is expensive or cheap.
The dollar is also a unit of savings, that is, a financial asset, whose value reflects less “fundamental” variables such as the interest rate differential between the peso and the dollar, or the financial and convertibility risk (read defaults, stocks and controls) of Argentine assets in relation to foreign ones.
In Argentina, as almost always in recent decades, the price of the dollar is determined not by trade equilibrium (the first role), but by financial equilibrium (the second role). The peso appreciates when financial capitals enter convinced that the country is heading towards normalizing its economy and depreciates when these capitals take profits or lose faith. This reflects partly real signals and partly beliefs, amplified by herd behavior – fear of losing business in the upswing, panic and the 12-door effect in the downside – typical of atomized investors.
The speculative nature of investment in one currency, the peso, has also been voided by the dollarization of local savings and abandoned by long-term investors. If the latter sounds circular, it is because it is: the dollarization of our savings and the capitulation of more stable foreign investors (mutual and institutional funds) make the peso more sensitive to the financial cycle, that is, more volatile, scaring off local savers and stable investors.
Is the peso expensive?
Looking at the evolution of the inflation-adjusted exchange rate in relation to other countries, we would say that, although it could be more depreciated to offset export taxes, the peso is not excessively overvalued.
Looking at the relationship between supply and demand in the currency market, we would say that the peso is very expensive. Just imagine what would happen if we removed the stocks: without intervention, the exchange rate would rise dramatically and immediately; with intervention, we would quickly deplete reserves.
Trade balance rarely equals financial balance. This dichotomy, which is not unusual in other developing economies, takes on additional gravity in Argentina. To the aforementioned illiquidity of the peso market, which adds volatility to the financial equilibrium, we must add a third role of the dollar, the unit of account: the implicit indexation of many prices to the exchange rate increases the impact of a devaluation on inflation.
Why doesn’t Argentina float and let the peso find its balance? Because the financial equilibrium is uncertain and elastic. In the good times, without the intervention of the Central Bank, the appreciation would have no limits and would punish local production. In bad times, without the supply of dollars, demand could plunge the peso into a downward spiral.
It is common to throw in the face of central banks that buy “expensive” the same dollars that in a few years they sell at a higher parity to avoid excessive depreciation. Few developing countries do not manage exchange rate variations, almost always to adjust the financial balance to the commercial one. In Argentina, the difference between financial and commercial is unmanageable today. Hence, the web of controls and regulations that try unsuccessfully to square this circle.
Assuming that the causes that give rise to this extreme dichotomy (unsustainability and fiscal inconsistency, negative expectations, implosion of the market in pesos) do not change in the coming months, and given that the dollar has two roles and that each role has its balance, the natural thing would be that each equilibrium had its price. That’s what it’s all about, neither more nor less, split between a commercial and a financial exchange rate: of a high saving dollar that reduces the dollarization of assets and stimulates the inflow of capital, without contaminating the commercial dollar that determines inflation.
Why do not you do? The contraindications are several, none of them insurmountable.
To begin with, the unfolding would violate article 8 of the IMF, which prohibits the country from having multiple exchange rates unless approved by the IMF, something that would not be unlikely if the arrangement is temporary. Alternatively, a “fiscal split” could be implemented based on purchase taxes (as with the “solidarity” dollar) and a refund on sales not related to foreign trade operations.
A second obstacle is financial assets denominated in (or indexed to) the dollar, issued prior to the split– Passing them on to the financier would trigger litigation and bankruptcies; leave them to the commercial (as now), it could be seen as exchange insurance. The brand new deposits indexed to the official dollar add a new dimension to this problem.
A third obstacle, perhaps the most relevant, is the tsunami of pesos that, if that channel were to open, would go against the supply of financial dollars. The Central Bank should also intervene in the financial market, with the advantage that it would do so at a level well above the official level. Having said that, the recent pandemic issuance may require, at least initially, some purchase limit – less than $ 200 a month.
The fourth obstacle is political: some sectors will ask to liquidate exports at the financial exchange rate to offset the impact of withholdings. Liquidating exports to the financier would have essentially the same effect as a devaluation of the official: higher inflation, which is precisely what the doubling is trying to avoid.
The last obstacle, the most classic, is perhaps the least critical. The incentives for spills and arbitrations to appear: overbilling and anticipation of imports, underbilling of exports, already exist today in the presence of a parallel exchange rate, which is almost double that of the official one.
Unfolding is not a remedy, it is just a balm; In the words of the Minister of Economy, Martín Guzmán, it would be a measure “to endure”. In principle, there are no fundamental reasons for an exchange rate gap of 80%, unless we expect a devaluation or a jump in inflation that leads to an exchange rate spiralization. A credible monetary program Central Bank would help eliminate this self-fulfilling prophecy. A fiscal consolidation budgetTogether with a financial program based on the development of the indexed peso market to reduce external dependence, it would give credibility to the monetary program. Today neither of these two elements is still on the table, and the few signs that the Government emits point in the opposite direction.
In addition to the contraindications to splitting already mentioned, the management capacity and transparency essential for a regime of this type are added.. By all this, it is understood the reluctance of the economic team (and many economists) to advance with this obsolete “innovation”. But the alternative of waiting for the exchange rate peace to arrive alone, or hand in hand with confidence in an eventual financial and fiscal program, is optimistic and, in the absence of options, risky. As the old adage goes, the good politician plans for the worst.