Juan Strasnoy Peyre 
After 100 days of President Javier Milei’s administration, the market is speculating about when the government will move on from the economic “transition” scheme of fiscal and monetary adjustment that it started out with.
In particular, all eyes are on when he will implement the promised elimination of exchange rate restrictions, known as the cepo, which Milei has established as the next step. However, analysts agree that getting rid of the exchange restrictions will be a gradual process and that unifying all existing exchange rates is not around the corner.
While celebrating the positive evolution of macro-financial variables on top of a collapsing real economy, Milei has proposed the following path: lifting currency controls, establishing currency competition, and closing the Central Bank (BCRA, by its Spanish acronym). In recent days, both he and Economy Minister Luis Caputo referred to the first point, although they were guarded about how soon exchange deregulation would happen.
“The end of the cepo is closer,” the president said on Sunday on La Nación+ TV channel, but also clarified that there is still no certainty that, if implemented now, there would not be a currency run. In other words, he recognizes that he still does not have enough international reserves to mitigate risks.
Thus, there are two areas of focus in the economic team. On one hand, they believe they need to continue liquefying the Central Bank ‘s remunerated liabilities in order to avoid flight to the dollar once the restrictions are lifted. This explains the recent reduction of the annual nominal interest rate from 100% to 80%. On the other hand, they aim to obtain as yet elusive loans in U.S. dollars that would speed up the recovery of international reserves.
“If I get US$15 billion, I automatically lift currency controls,” said Milei, who also spoke of the negotiations with the International Monetary Fund for a new program and conversations with private funds.
The market took notice of those statements. In a conversation with the Herald’s sister publication, Ambito, two City brokers agreed that it’s hard to imagine currency controls being lifted before midyear. One believed this would be linked to the timeframe of the IMF negotiations. The BCRA is accumulating a strong buying balance of US$10.7 billion thanks to deferred import payments, but net reserves are still negative.
Currency controls and the interest rate cut
Consulting firm 1816 focused on the rate reduction the BCRA determined last week and detected an implicit signal in relation to the exchange rate policy. The firm’s economists believe the fall of the blue chip swap rate (CCL) in recent weeks opened up two alternatives for the economy ministry staff: “It enabled progress in the (partial) release of the cepo, which would bring the economy closer to an exchange rate unification, or in a rate cut, which would accelerate the shrinking of the BCRA’s balance sheet in real terms. The government opted for the latter, demonstrating that the lifting of the cepo is not that close and unifying the exchange rate will have to wait.”
Given the interest rate reduction and considering Caputo’ statements about negotiating a new program with the IMF, 1816 believes the most probable scenario is an attempt to unify exchange rates by the end of the third quarter of this year or the beginning of the fourth.
On this issue, economist Leandro Ziccarelli, creator of the podcast Financiero, Monetario e Irreverente, said that the decision to keep the interest rate below inflation speeds up the erosion of purchasing power.
“I don’t think they’re considering lifting currency exchange controls from one day to the next, it’s going to be gradual,” said Ziccarelli. He, too, expects this will happen in the second semester. However, he warned that this depends on how exporters liquidating their grains harvest dollars with the Central Bank affects the gap between exchange rates (brecha), and whether there is a new IMF loan or not.
‘It will be risky’
“Exiting the cepo is always risky,” financial analyst Christian Buteler told Ámbito. “It was in 2015, when the situation was not as serious, so now it will be risky, too. For me, the best way to get out is quickly and with a low brecha.
“The Government seems to be looking to leave, but they want to improve the BCRA’s balance sheet. I don’t think they will get many more pesos than they already got with the BOPREAL bond and the repurchase of Treasury debt — that is already reaching its limit. And while it’s true that they do this to get more dollars in from the harvest, it’s also true that those dollars are bought in the market by issuing pesos. And on the other hand, the negative rate with which they’re try to liquefy the purchasing power of the pesos is going to be very difficult to sustain without the gap escalating.”
With all those cards on the table, Buteler believes the government will not move to dismantle the cepo overnight, but that “we’ll probably witness some partial exits”.
“Liberating absolutely everything, eliminating the PAIS tax — the fourth top grossing tax today — does not seem like the way to go. They will find a compromise to do so, and that will only happen after the harvest dollars kick in with a BCRA that has more dollars to soften any moves they make. But this is a day-to-day situation and we need to see what the variables look like when the time comes.”
