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Morning Comments | Argentina

August 21st, 2024

Trade Surplus Persistence Suggests Current FX Framework Could Endure for Longer

The trade balance reached a surplus of USD 1.6 Bn in July, according to official figures released yesterday. This marks the eighth consecutive monthly surplus since December 2023, when the new administration took office and adjusted the official exchange rate from ARS 366 to ARS 800.

 

So far, the accumulated trade surplus stands at USD 12 Bn. This is a substantial improvement from the USD 5 Bn deficit recorded in the first seven months of 2023.

 

The persistence of the trade surplus is noteworthy, especially as the Government has faced criticism regarding an alleged real appreciation of the exchange rate.

 

The magnitude of the surplus suggests that the real exchange rate remains competitive. Even though seasonally adjusted exports fell slightly (-1.4% MoM) and imports grew (+8.5% MoM), it is still too early to declare a reversal of the trend.

 

Moreover, the BCRA has resumed its accumulation of international reserves this month. Since the beginning of August, the Central Bank has purchased nearly USD 450 Mn.

 

The trade surplus is even more impressive considering that the Government has relaxed most of the quantitative restrictions that the previous administration imposed on imports. While the Central Bank continues to defer import payments, the low level of imports may indicate that the economic recession is persisting.

 

Contrary to those criticisms, we believe that the issue with the current FX framework is not that it tends to appreciate the real exchange rate, thereby hurting the external balance. Rather, as we have consistently argued, it restricts all inflows that do not originate from the trade balance. Ultimately, critics who believe the entire balance of payments can be sustained solely by goods exports are mistaken. Argentina requires genuine capital inflows through the capital account.

 

The figures released yesterday support our view that the peak of import payments, under the current framework, will likely occur in October. We anticipate that the Government may take further steps to relax capital controls by then (possibly adjusting the 80/20 blend scheme and/or the deferral of import payments), especially since it has also committed to reducing the PAIS tax on imports by September.

 

More importantly, with the trade balance remaining positive and the BCRA accumulating international reserves again, we reaffirm our scenario where this current FX framework may persist longer than the market is currently pricing.

 

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