Caputo, Bausili and the importance of “good calibration”

It is possible to link the decision to update the bands between which the exchange rate fluctuates to the pace of inflation (so far the correction is 1% per month) and to announce a reserve purchase program weak debt placement last week, for a rather modest amount by Luis Caputo’s standards (1,000 million US dollars) and with a rate close to double digits (9.26%).

After eight long years, Argentina returned last Wednesday to place dollar-denominated debt to meet the January 9 maturity of the AL29 and AL30 bonds amounting to $4.2 billion ($2.7 billion in principal and $1.5 billion in interest), while continuing with a Negotiating loans with international banks. The result, although not too far from expectations, was poor. And it contained a message from the market to Caputo. It won’t be that easy to get financing. A limit.

Three wheels after this tender and with the President of the Central Bank Santiago Bausili As an expression on his face, the Minister of Economic Affairs took a turn that was not on paper and announced what everyone had been asking him for months, including US Treasury, IMF —with which there are obligations— and a group of local economists very wide spectrum.

The government is giving in to pressure from the IMF and will implement a system for the dollar with inflation risk

Between the issuance of the bond and yesterday’s announcement, the publication of the Inflation rateThe accelerated again in November (2.5%) and expressed the upward curve that began in June.

In a presentation to the UIA’s 31st Industrial Conference just a month ago, Caputo again ruled out a system of floating exchange rates, saying, using the second person used by economists: “If you want to defend the bands,” they must be “well calibrated and especially the upper limit of the band.”Caputo explained. It’s part of the job of the economics minister: everything is always good until it unexpectedly changes into something better. Good calibration is important.

The likely impact of an announcement like yesterday’s – that the rise in the price of the dollar coincides with inflation and that the BCRA will begin purchasing reserves on a regular basis – is a greater pressure on the exchange ratethe economists agreed. Is the replacement anchor going out?one of the pillars of the economic strategy to control inflation? Bausili denied this.

“The flexibility of the bands was crucial. The 1% monthly regime led to a real appreciation of the unsustainable peso. The change alleviates this problem, but has clear costs: fewer exchange rate anchors, more inflation inertia and a slower path to disinflation.”Martín Rapetti, director of Equilibra, posted yesterday “It is the first step in a transition to greater exchange rate flexibility.”Rapetti said.

For former minister Hernán Lacunza of Empiria, “the change is positive.” “From tomorrow the exchange rate regime will be more credible. Of course there are (nominal) risks, but doing nothing was riskier.”Lacunza assured and emphasized that the “implicit recognition that the level of reserves is not indifferent to the real exchange rate” and “the link between the level of reserves and lower sovereign risk” are “healthy”.

Juan Pazo, director of ARCA, resigns and Andrés Vázquez takes over

The market agreed with Lacunza yesterday and also gave good news to the government: Country risk The JP Morgan index, which measures the overvaluation of government bonds compared to what the U.S. Treasury pays, ended down more than 5%, breaking through the 600-point mark, a range it had been parked in since Monday after the official victory on Oct. 28. And public securities rose.

Another economist read it this way. “It seems that the economic team has been waiting for this How great was the euphoria after the election?. And that wasn’t enough to not start correcting what we were all demanding, especially the markets.”

One question: will the new exchange rate be updated? promotes or harms the project of the “fiscal presumption of innocence”.“This is what the administration wants to approve in Congress to get people to spend the mattress dollars?

activity and employment

The Indec reports on it this afternoon Activity level in the third quarter. The latest data on economic activity for the second half of the year showed an increase of 6.3% compared to the same period last year, although a decline of 0.1% compared to the previous quarter.

The employment data will be released on Thursday. According to the latest Argentine Integrated Pension System (SIPA) report, revealed yesterday, Registered formal employment fell by 0.1% Compared to the previous month (-0.2% in the private sector and -0.7% in the private sector): since June there are 11.2 thousand fewer jobs and 49 thousand fewer. According to consultancy LCG, the report shows that 242,383 formal jobs have been lost since December 2023.

Next week the index will release the estimate Economic activity October: September saw 5% year-on-year growth and a 0.5% month-on-month increase. Among the sectors that recorded year-on-year increases in September, fisheries (58.2%) and financial intermediation (39.7%) stood out; This was the one with the highest incidence in the index. Manufacturing, on the other hand, recorded a year-on-year decline of 1%.

A question that would challenge the libertarian conceptual universe: Does Milei expect a recovery in industry activity at the price of having to accept a little more inflation? A Kirchnerist heresy.

ML