Dollar scarcity: consulting firms weigh in

The ongoing drought could result in greater inflation, more capital controls, and a contraction of the economic activity

Today marks the 23nd consecutive day that the Central Bank has had a negative balance in the official foreign exchange market (MULC). In 2023, the bank lost US$3.4 billion in the MULC – a symptom of the record-low dollar liquidation by the agricultural sector and an indicator of the overall international reserve scarcity.

According to a report by business consulting firm Ecolatina, net international reserves are less than US$500 million, a yearly US$7 billion drop up to last Thursday.

“The reserves are at a critical level,” said the report.

The main reason is the ongoing historical drought that will slash between US$18.5 and US$20 billion in agricultural exports this year, according to different calculations.

Ecolatina said the new “agro dollar” preferential exchange rate, announced today by Economy Minister Sergio Massa, would “not generate new dollars” and pointed out that the measure would only generate “calm in the short term at the cost of reducing sales going forward”. 

Another consulting firm says the possibilities of Argentina finishing the year with net reserves of US$10.27 billion, the revised International Monetary Fund (IMF) goal, are “null.”

However, a failure to comply with the IMF goals is not the gravest consequence the reserve scarcity can have on the economy.

Knock-on effects

“[The dollar scarcity] going to bring more tension to Massa’s plan over the year,” Santiago Manoukian, Ecolatina research lead, told the Herald. “It’s already bringing tension to the ‘crawling peg’ [the slow depreciation of the peso], which is he government’s strategy to avoid a devaluation through an abrupt currency correction.”

According to Manoukian, a contraction in economic activity is bound to happen. 

“The failed route of reserve generation [from the agricultural sector] which would in theory finance the deficit of other sectors of the economy will further limit the possibility of a relaxation in import restrictions,” said Manoukian.

The industrial manufacturing sector, for example, is heavily dependent on imports paid in US dollars and fell by 1.4% in February compared to 2022, according to the National Institute for Statistics and Census (INDEC). 

The US dollar scarcity is also putting pressure on the parallel dollar market — according to Ecolatina, last week ended with a 91% gap between the official exchange rate and the average between the blue-chip swap rate, the blue dollar, and the MEP dollar, 3.6% higher than  the previous week.

The  IMF forecasts a 60% inflation rate and a 2% GDP growth for 2023 for Argentina, but independent consultants say that the lender is underestimating the impact of the historic drought. Ecolatina forecasts a “very strong drop” in economic activity, which could go over 5%, and a monthly inflation rate that will eventually surpass 10%. Another consulting firm wrote that the best scenario for the country is a 120% inflation and a drop in economic activity between 2 and 3%.

That is not all – that report said that last Thursday, private dollar deposits fell by US$83 million. 

“The fall in reserves to date has not affected dollar-denominated private deposits”, said a report by a third consulting firm, Equilibra. 

“Although the banking system is very liquid in foreign currency, a scenario of further depleted  foreign currency reserves could generate greater deposit withdrawals, increased economic and political uncertainty, and trigger an inflationary spike.”

Equilibra suggests that the government has possibilities to request financing —  borrowing from Brazil, another “activation” of the China currency swap, a REPO line with banks, the World Bank, or the Inter-American Development Bank. However, they consider those options unlikely and insufficient.

 “It will not be enough to replace the dollars that will be lost with the drought,” the Equilibra report said.

The report forecasted a tightening of capital controls and an increased difficulty in getting import permissions from the government, “especially [for] consumer goods that could compete with local substitutes.” Equilibra also said that the Central Bank will very likely ask companies to renegotiate their private US dollar debt.

However, Equilibra discarded the idea that the government would implement a strong devaluation of the peso to avoid further loss of reserves.

 “A devaluation in this context would result in a strong acceleration of the inflation, a sharper fall in economic activity, and a huge economic and social conflict,” said the report. 

“It would be the final blow to any electoral aspirations the government could have, however modest they may be today”.


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