In the last two weeks, more precisely from December 4 to last Wednesday, the Treasury accelerated the pace of currency purchases in just eight working days, increasing its dollar deposits with the Central Bank (BCRA) from $97 million to almost $2,000 million, according to Invecq’s latest weekly report.
Specifically, the 1,962% increase in the economy’s foreign exchange holdings at headquarters was due to purchases worth an estimated $630 million, supplemented by net disbursements of $360 million from international organizations (the majority from the Inter-American Development Bank, IDB) and $910 million for the Bonares placement. In this way, the team led by Minister Luis Caputo anticipated the BCRA’s announcement that, from January, not only will the exchange rate bands of the “floating” system be changed from an adjustment at 1% to an adjustment according to the inflation rate of the second previous month, but the company will also start buying dollars and accumulating reserves to allow the “remonetization” of the economy, which, according to its forecasts, would consist in an increase in the currency base from 4.2 to 4.8%. of GDP. This “base case” assumes that the central bank would purchase $10,000 million, a figure that would increase by $7,000 for each additional point of GDP that the economy is “remonetized.”
“In the future,” explains the Invecq report, “the accumulation of reserves will essentially depend on the evolution of money demand, a variable that is historically volatile and difficult to predict in a context of persistent exchange controls. It is possible that the government trusts that the announcement alone will accelerate the decline in sovereign risk – already around 500 points today – and allow higher external debt at lower interest rates, thus facilitating the recomposition of the country’s assets. BCRA.” The system, it says, “continues to be a dependent financial account.”
Regarding the central bank’s announcements, the report says that they are “positive measures”, but at the same time warns of ongoing “doubts as to whether they will be sufficient to simultaneously meet the 2026 needs and the recomposition of the central bank’s assets”.
It reiterates that the measures “go in the right direction: the BCRA reaffirms its commitment to reserve accumulation, changes the approach that has existed since the implementation of the agreement with the IMF and readjusts the system to reduce the appreciation of the real exchange rate (RER), thereby regaining credibility of the program.”
The doubts or questions are related to whether this will be enough to simultaneously ensure a dollar supply that can meet needs in 2026 and rebuild the central bank’s assets.
“The biggest unknown lies in individuals’ hoarding: if it averages $2,000 million per month – a plausible figure at the current level of the Real Exchange Rate, RER.”
It happens that the financing requirements are very high. “Given our current account forecasts and the goal of accumulating $10,000 million this year, they could exceed $50,000 million,” Invecq cites shocking data that, however, refers to the demand for foreign currencies from families and companies last year.
“The key question is whether the market will be willing to finance these amounts, and in particular the extent of private dollarization. The economic team expects that foreign currency savings will decline significantly. Although this scenario seems plausible, we need to see to what extent. For reference, human hoarding averaged $21,000 million (US$24,000 million) at current prices in 2016-2019. US dollars in 2016). During this period, the TCR was at a level comparable to the current one in 2016, was lower in 2017 and higher in 2018-2019. In this context, trust in Milei and the consistency of the program will be the decisive factor,” says a key passage of the work.
The same confidence, believes Invecq, “will also be fundamental for the eventual resurgence of relevant financial flows. In the period 2016-2017, portfolio investments averaged 47.5 billion an agreement with the IMF: the validity of a program today leads to additional caution among investors, both due to the memory of the 2018-2019 exchange rate crisis and the fact that it is a “privileged “creditor”.
For this reason, he concludes that “the accumulation of reserves will depend essentially on the evolution of money demand, a variable that is historically volatile and difficult to predict in a context in which exchange controls remain in place. It is possible that the government trusts that the announcement alone will accelerate the decline in sovereign risk – already around 500 points today – and allow higher external debt at lower interest rates, thus facilitating the recomposition of the BCRA’s assets.”
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