Report Nº: 107818/07/2024
Once again, the parallel dollar is a cause of concern. The government reacted boldly by announcing that it will intervene in the parallel dollar market to suck pesos out of the market. For this strategy to succeed, it is essential to accelerate the implementation of the structural reforms included in the May Act.
The parallel dollar remained relatively stable at AR$1,000 between October 2023 and March 2024. From April onwards it began to slide, reaching AR$1,300 in May, AR$1,400 in June and in only 2 weeks of July it already reached AR$1,500. After 6 months of tranquility, in 3 months this climb up caused concern. There are many precedents in the past announcing a dollar slide as the beginning of a current crisis.
The point that most collides with the government’s plan is that this dynamic of the parallel dollar opens the gap with the official dollar to more than 50%. This increases adverse expectations regarding the sustainability of the official dollar. The government, in order to make its policy with the official dollar more forceful, decided that every time it issues pesos to buy dollars in the official market, it will immediately sell in the parallel market the amount of dollars sufficient to withdraw the issued pesos from the market. With no fiscal or quasi-fiscal deficit, this measure closes all monetary issuance windows.
A reference to understanding the situation is to compare the nominal rise of the parallel dollar with those of other relevant variables, such as consumer prices and wages. According to the Ministry of Economy, between 2022 and 2023, the three variables were at parity. On the other hand, between November 2023 and July 2024, it is observed that:
These data show that the parallel dollar is growing, but well below inflation and wages. It should be clarified that prices and salaries can grow steadily above the dollar. But, for this to happen, they must be accompanied by increases in productivity and/or a massive inflow of dollars from abroad. Neither of these conditions is currently in place. Economic activity is stagnant and capital flows are pressing more to leave than to enter the country. Therefore, the dollar´s rise should be taken as an update accompanying inflation and wages.
This background suggests that the government’s main motivation in selling dollars from the Central Bank in the parallel market is to accelerate the decline in inflation. With the monetary base fixed (because all sources of monetary issuance will be closed), it is expected to reduce the gap, defend the rule of devaluation of the official dollar at 2% per month and, with this, moderate inflationary expectations. This is a risky operation, especially in the context of low reserves and with possible negative collateral effects. The most important one is the prolongation of the economic recession as a result of the monetary astringency and the low competitiveness of domestic production.
The way to reduce these risks and negative collateral effects of the measure is to accelerate the transformation of the economy. On the one hand, to make the fiscal balance sustainable. This now becomes even more essential as the Treasury has to take over the Central Bank’s debt. It implies migrating from a traditional fiscal adjustment, much based on the real value loss of expenses and the application of distortionary taxes (PAIS tax and export duties), to a comprehensive reorganization of the public sector. On the other hand, to allows domestic production to be competitive at the official exchange rate. This implies generating a regulatory, tax and public services quality environment allowing Argentine companies to be competitive in international markets.
Monetary consolidation (no more issuance) is a powerful signal in the fight against inflation. But it is extremely demanding from a fiscal and competitiveness point of view. It is a risky and rigid strategy. Its success will depend on how much conviction and skill the government displays in implementing the transformations listed in the May Act.
