Econviews Macro Monitor - December


On the wait for the agreement with the IMF

Next week the Minister of Economy will present to the National Congress his "multi-year plan", with the axis of the economic policy for the coming years, in the framework of an agreement with the IMF - which the authorities have been saying for a while that it is "almost closed".

But beyond the much-needed economic roadmap for the medium term, the short-term situation is pressing. The Central Bank has few reserves and the undervalued FX rate of recent months worsens the situation: an explosive cocktail for devaluation expectations.

Will the summer of 2014 be repeated, or could the government reach the months of liquidation of the gross harvest without a discrete jump in the FX rate?

The FX situation and a hot summer

Net reserves are at critical levels. When the exchange rate jumped 23% monthly in January 2014, net reserves were at an estimated USD 19 bn. Nowadays the situation is more delicate: the Central Bank has just over USD 6 bn of net reserves.

The strategy of using the exchange rate as an anchor against inflation did not yield the desired results and the average monthly inflation since March has been 3.5%. However, intervening on the nominal exchange rate led to an undervalued real exchange rate, which is at its lowest level since May 2018 (pre-devaluation). And only 3% above December 2013 level.

The increase in the spread between the official rate and the blue-chip-swap rate, on the other hand, creates incentives to advance import payments and delay the liquidation of exports- which has been offset by the high prices of commodities, which are now falling. The spread is well above 100% and reducing it will be a priority in an agreement with the IMF.

In this context, last October the Central Bank decided to partially close the tap on payments of goods imports. Not only did advance payments on imports fall -which are more affected by the dynamics of the FX gap- but also those made when the merchandise was on the way or was already in the country.

And with this, the Central Bank managed to buy about USD 207 million in October. But aware that stopping imports would affect the level of activity, in November the obstacles were reduced... and the Central Bank had to sell USD 889 million.

How long can this dynamic be sustained? Will March be reached without exchange rate shocks? The official answer is that an exchange rate jump is not in the plans, but that the rate of depreciation will accelerate "to the extent that prices allow it."

Growth: the solution to all problems?

Economic activity is recovering. The sectors that were most affected by the closing of previous months today are pushing activity, while industry and construction remain at good levels, although they have lost dynamism. But the openings (and salary increases in recent months) have helped the recovery of consumption in sectors such as restaurants and hotels, cinemas, theaters and transport.

Although there are still no details of the "multi-year plan", the official communication so far indicates that the solution to the exchange rate, fiscal and even inflation problems will be through growth. But is it enough to just grow?

Even assuming that the recipe works - it is not our view - there are risks for next year's growth. It is true, the statistical carry-over is very high and if there is no recession, the economy could grow above 3%. But the external context of 2022 will be different from that of 2021. The prices of agricultural commodities have fallen and, if the dollar strengthens, they will continue to fall. Brazil, our main trading partner, officially entered a recession and the outlook for next year continues to worsen. In addition, world inflation predicts an increase in interest rates, which would put pressure on emerging economies. And the pandemic has not yet been overcome.

The outlook is complex, and any government plan should aim to reduce uncertainty for the next few years -but also for next summer.

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