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Tuesday, December 06, 2022

Emmanuel Alvarez Aegis: “The government carried out a conformal devaluation rather than a horizontal devaluation”

Emmanuel Alvarez Aegis: "The government carried out a conformal devaluation rather than a horizontal devaluation"

Former Deputy Minister of Economy and current director of consulting firm PxQ, Emmanuel Alvarez Aegis, Participated in the third edition of the cycle “3 Days C/BYMA”Event on Technology, Investment and Economy organized by the Argentine Markets Exchange (BYMA). in that framework, Diagnosed Argentina’s economy, questioned the government’s course on the matter and confirmed that a “stabilization program” was needed. which allows the realization of the purchasing power of wages. In addition, he emphasized the need for “True Real Exchange Rate”,

during the talks, which were moderated by Alexander BurneyAlvarez Agis, executive director of Caja de Velores (BYMA Group), noted the debt crisis in the peso issued last June and Key economic challenges that the government will face during the remainder of 2022 and the coming yearWhich will pass through elections.

“The crisis started in June after the decline in debt in the peso [el entonces ministro de Economía] Martin Guzman You [el presidente del Banco Central] Miguel PesceOne said it was necessary to intervene and the other not, due to which the reserves fell, the exchange rate gap widened and a crisis was created that led to a change of minister,” the economist said.

in that sense, Alvarez Agis explained that the outbreak did not occur earlier because “economic policy was configured to expand the economy to the maximum in the first half of this year”., He specified: “The real interest rate averaged 20 points negative, while spending was eleven points above inflation.”

and continued: “Ultra-expensive fiscal policy, more ultra-expensive monetary policy, more delays in the exchange rate resulted in the economy growing 7% – the good part – and that we ran out of reserves – the bad part. Therefore, at some point, given the weakness of the Central Bank, the debt crisis in the peso was about to appear and Massa took over the net reserves of US$1.5 billion.

According to Alvarez Agis, the crisis could have been resolved by implementing a contractionary economic policy. “Raise interest rates, reduce public spending and devalue. However, the government decided to do only two of these three things: raise the interest rate and bring it in line with the rate of inflation, and reduce public spending by raising rates.He specified in clear criticism of the official decision not to correct the exchange rate.

Along these lines, the economist compared it with the devaluation context of 2014, when, as deputy minister of economy, he was part of the economic team that opted for a 23% devaluation.

Axel Kisilof and Emmanuel Alvarez Agis, during their tenure at the Ministry of Economy (2013–2015)Maximilian Amena

“When one wants to correct the real exchange rate, one has to take into account the nominal dynamics because it is not about devaluing for the sake of devaluation, but doing so to make the economy more competitive”, he expressed. And he pointed out: “The first thing to consider is the speed at which the nominal comes in. In 2014, year-on-year inflation stood at 29% and 71% in July 2022, while monthly inflation stood at 3% and 7%, respectively. The second is to analyze the exchange rate difference. It was 48% the day before the devaluation in 2014 and 117% last July. And the third thing is to see how much net reserves are in the Central Bank. In 2014, his amount stood at US$18,000 million and last July at US$3,000 million.

“With these numbers – Alvarez Agis predicted – a fanatic in the economy would say 100% devaluation would be necessary, while in politics one would say 0%. Average suggests that if all you want to do is depreciate in half to correct to the real exchange rate.

However, the expert “bridled the gap” with the context in which he was an officer, and clarified: “It cools back, with a government that said it doesn’t believe in economic plans and refused to present it until last March at the opportunity to sign a deal with the IMF.”

“The nominal effect of the devaluation and the fear of its retreating effect made the government try to stabilize the BRCA reserves, but only with two of the three classic instruments. The theory says that if you don’t use all three you have to put more emphasis on the others. Therefore, to avoid this excessive exertion, what was done was a commensurate devaluation rather than a horizontal devaluation”, assured the economist.

Clearly, lvarez Agís developed what he considers to be the main variable that prompted the government not to touch the exchange rate: political factors, “To understand last year’s fiscal policy, we are forced to negotiate with political factors because if not, we do not understand how to proceed towards reducing the fiscal deficit,” he said.

“Until Guzman’s departure, fiscal policy was highly expansive. With Massa’s entry, public spending entered negative territory. Clearly the fear caused by the financial crisis in June, which left us almost without reserves, triggered a backlash in fiscal policy, which went on to contract by extension,” assured the expert.

“There is a reassessment of monetary and fiscal policy aimed at stabilizing the economy and rebuilding reserves, measures that have helped For this, such as the soybean dollar, the non-automatic license, the Qatar dollar, the luxury dollar, the Coldplay dollar and the Argentine Republic’s new import system”, Alvarez Agis specified.

And he gave the opinion: “They are all initiatives that have the same objective, which is to rebuild the reserves”With which, if devaluation reorganizes reserves through contraction of economic activity, these measures For this they are similar, It’s just that they are tailored suits. They are less effective and do not pay one of the costs of devaluation, which is that the acceleration of the inflation rate results in a food sensitive areas,,

Private Analysts Indicate That The Consumer Price Index (Cpi) For October Will Rise Between 6.5% And 7.2%
Private analysts indicate that the Consumer Price Index (CPI) for October will rise between 6.5% and 7.2%Fabian Marelli

However, The Economist underlined that “one of these levels is already raising doubts about whether a greater evil is not being generated to avoid the lesser evil”, and he thought: “Why not improve [cambiaria] More aggressive then?

in that sense, Alvarez Aegis develops “pocket vote index” to analyze labor market data Comparatively between PASO 2011 and PASO 2021, setting a launch for September 2022. in that line, He emphasized the loss of purchasing power, which, in his opinion, could explain the government’s fear of facing devaluation due to the election results.

“Based on this, we see that Minister Massa’s decision has to do with trying to stabilize the economy and reform the pocket sector,” he explained. However, he clarified: “You don’t get away with the easy recipe (increasing public spending or accelerating the analogy to recovery of purchasing power) because at an inflation rate of 6% or 7% monthly Those tools are no longer effective”,

“You cannot increase the actual salary by increasing the nominal. Attempting to do so backfires, even for those whose aim is to raise real wages, which are far too low,” assures Alvarez Aegis. Can the government reverse it? “The chances are largely against. However, he will try. That is why a concept which is a “stabilization scheme” has become so fashionable, he ventured.

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