A new set of measures has been announced by the Central Bank and the Treasury to curb the currency run and the FX reserves depletion. Despite the coordinated message to show this package as a silver-bullet-this-time-is-different program, we believe they fell short and are not enough to reverse the market’s lack of trust: micro-interventions are useless against broader macro inconsistencies.
The Central Bank repo rate was increased 500 bps to 24% but, near the small hours of the night announced that banks have to reduce 20% of their net Leliq holdings. A back-of-the-envelope estimate, assuming that all the unwinding of the LELIQs moves to Repos leaves the effective monetary policy almost unchanged at about 32.7%. An initial signal that pointed to monetary tightening was quickly reversed with further financial repression.
This back and forth to offset the costs of higher repo rates exposes the monetary conundrum that we highlighted in our last Macro update. Central Bank’s liabilities are already turning into a debt problem and rising interest rates may trigger endogenously explosive dynamics.
A new FX regime was also announced and a 1% devaluation of the FX for today was transpired to the press. The crawling peg will be replaced by a more volatile intervention system. Whether this is an excuse to accelerate the devaluation rate or a doomed attempt to stop a currency run with micro volatile interventions has yet to be seen. The CB also confirmed its intentions to use US$14bn bond holdings, equivalent to issuing 14%/15% USD debt, to curb the blue-chip swap
Fiscal measures were also announced with a number of tax reliefs to exporters to induce sales: soybeans export tax goes down 3pp in October to gradually recover by January and soybeans pellets and diesel oil go to 26-27%. industrial tax export for final products is permanently reduced by 5pp and processed materials by 1pp. We don’t expect this to have any significant impact on accelerating exports.
Fiscal action exposes two shortcomings of the official diagnosis of the crisis: the emphasis on “lack of exports” to explain the depletion of the reserves, even though the 12 months running trade balance is in historical highs, and the ease with which the objective of fiscal consolidation – the elephant in the room – is relegated to the background.
We maintain our 2021 outlook unchanged. The silver bullet combo of measures looks like bread for today and hunger for tomorrow as they only seek to address the very short term need to stop the depletion, of reserves building a bridge into 2021 when fiscal and monetary macro imbalances will still be there.