Argentina to buy $5 BL to hold dollar

Peso issue by Argentine Central Bank (BCRA) to defend high dollar is one the greatest matters government must overcome to reduce inflation. For that reason, next year, economy minister Martín Lousteau, rather than BCRA head Martín Redrado, will have a more active role in dollar purchase. It would reach to $5 billions during 2008, tripling this year's. To achieve so, he will have fiscal surplus funds. First, obviously, government will have to strengthen this higher saving (vowing 3.8 per cent of GDP) after a year of spendthrift behaviour.

BCRA purchases - Volume of foreign currency acquistion in millions of dollars

Argentine Treasury will have a more active role in defending dollar value in 2008. According to talks being held between Economy Ministry and Central Bank (BCRA, in its Spanish acronym), current administration would buy as much as $5 billions in foreign exchange market, almost tripling this year's.

This commitment will be reflected in 2008 Monetary Program, which BCRA is about to finish. As provided in the entity's Articles of Agreement, it will be introduced by BCRA head Martín Redrado before the Senate in ten days (December 26 or 27).

The level of intervention Treasury will have in strategy to buy dollars next year will be the last piece of information to include. Such box has not been filled yet. However, there's already an agreement between the monetary authority and government to prevent purchase figure from lowering from $3 billions. Yet, it may extend to $5 billions. This figure had been agreed between Redrado and former economy minister Miguel Peirano, but it was approved by the new economy minister, Martín Lousteau. In 2007, Treasury participation in dollar acquisition was the lowest one of the last years. It did not reach to ARG$5 billions, equivalent to around $1.6 billion.

Fiscal anchor

This greater aid of Treasury planned for next year would only be possible with the expected recovery of fiscal surplus in 2008. From a fiscal saving of only 2.2 per cent of GDP in 2007 (it will end up being more than 3 per cent due to pension reform's resources), government has committed to jump to 3.8 per cent next year. Therefore, with such greater saving level, it would be possible to ease the burden on BCRA to sustain nominal exchange rate.

In this way, the fiscal anchor will also be backed by the monetary anchor. In other words, if current administration tries hard to improve public finances, it's crucial, in tune, that the level of pesos issued by BCRA also lowers. Control of both variables would at least curb inflation acceleration throughout 2007.

Details

Next you will find the details of 2008 Monetary Program:

Dollar inflow during 2007 was lower than last year's. Around $11 billions came in, while, in 2006, $13 billions. This collapse stemmed from capital flight posted in August-October quarter (more than $5 billions). For 2008, the figure would settle at a $10-billion floor and a $14-billion ceiling.

The monetary base (monetary circulation plus demand accounts) would also have a more stable performance thanks to lower issue of pesos by BCRA. It would grow between 20 per cent and 22 per cent (i.e. similar to nominal GDP increase, arising from real growth plus inflation expected for 2008). However, the entire effort should not fall on public sector deposits (as it happened this year). Rather, the intention is to also have a less volatile performance of private sector cash.

As BCRA will have less pressure to buy dollars, peso issue will fall. Therefore, the need to issue LEBAC and NOBAC (BCRA's Bills of Exchange and Securities) to sterilize would reduce. If this plan is observed, we'll have, as a consequence, less pressure on interest rates and, therefore, a gradual decrease. Of course that a reduction in cash cost for higher-than-30-day terms also depends on curbing inflation.

There's another particular factor in Argentina which goes beyond monetary program to prevent an inflationary escalation. It's related to Argentine Statistics and Census Institute (INDEC, in its Spanish acronym) and doubts about how it works. Without a "thermometer" helping to measure prices, the strategies to reduce inflation are less effective.