Monday, July 6, 2020

OPINION AND ANALYSIS | 05-05-2018 10:57

Greenback takes frontstage

Most experts date the stampede at the end of April back to the ‘original sin’ of the ‘recalibration’ of inflation targets on December but I would also trace it to an underlying schizophrenia going much further back – the simultaneous desire to hold down the dollar as an anchor against inflation

Green would seem to be the operative colour these days in view of recent exchange market trends and the rainfall restoring verdancy to Argentine fields. The greening of Argentina is a subject which never fails to interest the New England academic Dr Hale who writes: “Just in the last few days I think I may have discovered the real reason why I have always been fascinated by your country – I’m so obsessed with Argentina because Argentina is so obsessed with my currency, the dollar. The late Irish-American writer J.P. Donleavy (who lived almost next door to me for a while) once justified his years of residence on this side of the Atlantic by saying: ‘I could only live in the United States because it’s the only country in the world which hasn’t been Americanised.’ When I look at countries like Russia or Argentina, I can see how that applies to currency – only one dollar out of every four actually circulates within the USA. “Last week we were communicating at a fairly abstract level just when all hell was starting to break loose with the dollar. The illusion that the peso could float when it has been sinking for decades now seems to have been exposed as a shambles. Can you bring me up to date and where does it go from here?”

My reply:

“More the former than the latter. Interesting that you should mention Russia and Argentina as two of the world’s most hyperdollarised economies because both are also among the very few countries with the potential self-sufficiency to go it alone – perhaps they do go it alone in many ways and thus miss out on most international connections, ending up with the dollar.

“Most experts date the stampede at the end of April back to the ‘original sin’ of the ‘recalibration’ of inflation targets on December 28 (the Argentine equivalent of April Fools’ Day) when Central Bank Independence seemed a travesty even ahead of a floating currency but I would also trace it to an underlying schizophrenia going much further back – the simultaneous desire to hold down the dollar as an anchor against inflation and to give it air in order to make the economy more competitive. A touch of schizophrenia too in the shifting tactics to halt a surging dollar last week – depleting Central Bank reserves to the tune of over US$4.3 billion in a vain bid to stop the rot before jacking up interest rates by fully three percent to make the peso more attractive. That did the trick on the day by pushing the dollar below the 21-peso mark although it stormed back beyond that level within hours of the markets re-opening this week after May Day, despite sacrificing US$500 million more in reserves and beyond 23 pesos the day after. Country risk has risen by some 100 points. Will the response to this new challenge be as confused as last week?

“Whether last week’s volatility will be repeated on that scale remains to be seen – the intensity was boosted by bad timing more than once. Firstly, the multi-billion sacrifice of reserves was on a collision course with rising US Treasury bond rates pushing down currencies worldwide. Secondly, this turbulent week coincided with the extension of the five percent financial levy to foreign investors, thus prompting them to divest their Lebacs etc. on the eve of exposure to this tax and thus having 45 billion more pesos chasing dollars (or around half the reserves sold) at a stroke. A perfect storm. All in all, more costs than benefits yet although clearly the wrong time to confront the dollar, the government felt it had no choice due to inflation spiking with the steep utility bill increases.

“All emerging markets face a common problem from the ‘flight to quality’ prompted by higher US interest rates (perhaps inevitable in the light of Donald Trump’s higher deficits with a publicsector borrowing requirement of around half of Argentina’s entire economy) but it is far more complex in Argentina for at least two reasons – no other country in the region has anything like our chronic inflation (except Venezuela) and no other shares our peculiar history of fascination with the greenback (except perhaps Ecuador where the dollar has been their currency all this century so far). Needless to say, the latter is very much the consequence of the former. So little does the dollar feature in everyday life in Brazil, for example, that my impression is that the percentage of Brazilians who could give you the exchange rate off the top of their heads might be even lower than the percentage admiring President Michel Temer. By the same token the psychological (and real) impact of any devaluation is much greater here than in Brazil.

“A third difference is that while other countries in the region will be carefully watching every move by Jerome Powell’s Federal Reserve in order to calibrate their reactions, here in Argentina the dollar has pretty much a life of its own. So much so that many here often forget that it is actually a US currency and tend to assume that its value will be totally conditioned by local factors. And also needless to say is that (as in Russia) the dollar is very much synonymous with the underground economy, thus explaining the relative indifference to what might be going on in Powell’s mind.

“The dollar is obviously the great focus for current uncertainty but there are also other areas. If trimming real wages and slashing public service subsidies are the two main hopes for fiscal retrenchment this year, both are in trouble. If inflation in the first third of this year is already around nine percent, what are the chances of imposing the official wage increase cap of 15 percent in collective bargaining? Meanwhile, the steep increases in gas and other bills so central to lowering the fiscal deficit via subsidy cuts are being complicated by the sustained Congress bid to roll them back. Yet the government needs these subsidy cuts more than ever because the debt route to deficit financing is being jeopardised by the difficulties facing all emerging markets. A category which we will charitably extend to Argentina since it is still formally a frontier market – this must change if only because it is hard to imagine a G20 summit being chaired by a frontier market.

“In conclusion, I cannot really tell you what’s going to happen but then you wouldn’t be interested if it were all predictable, would you?”

Michael Soltys

Michael Soltys

Michael Soltys, who first entered the Buenos Aires Herald in 1983, held various editorial posts at the newspaper from 1990 and was the lead writer of the publication’s editorials from 1987 until 2017.

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