Dollar, exports and rates: the changes imposed by the new global scenario

Some local economy data begin to define the conditions of the economic scenario that Argentina will face in 2022.

The Ministry of Labor announced that, in January, registered employment recovered 0.3% and 4.6% in year-on-year terms. The variation with respect to the levels prior to the pandemic, meanwhile, was 3.3%. In 12 months, private employees (+3.7%) and self-employed (+8.4%) were the ones who showed the greatest increases.

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Also in March, the average taxable compensation of stable workers (Ripte) climbed to $121,220. In this way, he showed acceleration of almost 60% nominal annual and a actual 7.8%about.

The INDEC reported that in March the industrial activity had a contraction monthly growth of 1.9%, while the annual advance was 3.6%. In year-on-year terms, the division with the greatest weight was clothing, leather and footwear (+27.3%), followed by wood, paper, publishing and printing (+7.2%).

For its part, in March, the construction presented a decline greater than that of the industry, since it fell 4.1% monthly. In one year, this activity presented an advance of 1.9%. The import restrictions key inputs and power shortage is affecting industrial activity. This is expressing itself through unstable behaviors since the beginning of 2022.

The report of prices and quantities of foreign trade (Indec) pointed out that, in the first quarter of 2022, the export prices increased by 21.7% year-on-year, while import prices they did so in 16.1%. Referring to quantities, exports grew by 3.2% year-on-year, while imports advanced by 20.2%. The export item with the greatest increases was Fuel and Energy, in which prices rose 68.3% annually. In quantities, they did so by 15.2%.

Likewise, the AFIP reported that the collection tax reached a 64% annual growth, driven mainly by the increase in taxes associated with Income (+82%), Social Security (+72%) and VAT (+69%). In real terms, we are talking about a rise of 6% year-on-year.

News from the United States

Despite this, perhaps the most relevant aspect is the impact (at the international level) of the Fed’s decision to raise the monetary policy rate. Despite the fact that our country finds itself with few flows of funds and a relatively low commercial exchange, this data will not be without consequences.

In this regard, the first reactions and considerations were as follows:

• Although it involved Biggest rate hike in more than 20 years, the impact was softened (initially) because a movement in that direction was discounted. Even the market expected a more aggressive actionwith rises of 75 points, something that the head of the Fed, Jerome Powellruled out
• The measures reflect a certain tolerance for price increases in pursuit of minimize the unavoidable impact on economic activity. As much as Powell sees an overheated economy, with excess supply and a loose labor market, he said that it is likely that the rate increases in the next meetings will not exceed 50 basis points.
• The reading of the markets was reflected in increases in the main indices such as the Nasdaq and the S&P, with rises of 3.2% and 3%, respectively. the curve of Treasury bond American, in turn, accelerated the increase in its slope, with increases in rates led by bonds over 10 years, which widened the gap with short-term bonds.
• In summary, the market seems to assign less probability to a strong recession in the near future. Although he assumes that he will have to live with price increases for a while longer than expected.

In itself, the “soft landing” (soft landing) of the Fed had repercussions on the monetary level, since the dollar weakened (at the time of the announcement) against all currencies, with a drop of close to 1% in the Dollar Index. However, the next day resumed the uptrend which has been increasing since the end of March, in line with a longer-term perspective.

This perspective contemplates a contractionary monetary policySlow, but persistent. Indeed, Powell had no problem stating that rates higher than the natural rate of 3% could be reached. The market was prepared for more aggressive policies, but the slowdown in economic activity is inevitable.

The impact of the rise in international rates in Argentina

Specifically, this situation could affect our country mainly through the prices of commoditieswhich historically respond to the down with rate hikes. At the moment, this was not seen because the effect of the conflict between Russia and Ukraine still persists (both in energy, as in fuels, and raw materials). The shocks reales about the markets commodities are having a gravitation greater than the financiers.

If there is a decrease in the price of the commoditiesthe situation could be complex, since the record exports of the first quarter of 2022 were mainly due to the price effect rather than quantity.

That is, there was a record of foreign currency that entered the country during the first quarter, which was not the product of a considerable increase in the quantities exported, but rather by the high international prices (The terms of trade during the first three months were the most favorable in Argentine history). If the upward trend reverses, the accumulation of reserves would enter negative territory and also the tax revenue associates.

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The contractionary policy of the Fed and the strengthening of the dollar will lead to flows of funds leaving emerging markets to seek yields in the United States. Argentina will not be directly affected by this, as it is not exposed to the international credit market.

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The rest of the countries in the region will suffer. Who is it? With increases in the interest rate of 100 basic points, this is the case of Brazil and Colombia and 125 points in the case of Chile. In short, it will be key that the Banco Central closely monitor these movements to avoid deepening the exchange delay and the loss of competitivenesswith a multilateral real exchange rate that has fallen steadily since 2021 and is at its lowest level in 4 years.

*Federico Pablo Vacalebre is a professor at the CEMA University.