Photo via Perfil

The Macri administration won a key battle in the economic landscape yesterday: it managed to auction all the treasury notes known as Lebacs that were set to expire today – which overall amounted to US $30 billion – and, at the same time, appreciate the peso against the dollar by 3.7 percent, on a day in which most similar currencies lost ground as a result of the US Fed’s decision to increase the interest rates of its 10-year bonds to 3.9 percent, its highest level in seven years.

A coordinated move from the Central Bank (BCRA) and the Ministry of Finance led by Luis Caputo was key at the time of reaching this goal: the BCRA repeated the strategy it had implemented on the previous day, of bidding US $5 billion – almost 10 percent of its total reserves – at a rate of US $25 to prevent the currency from depreciating more. Even though it had to sell roughly US $800 million, twice as the day before, the barrier held. On its, end the Ministry of Finance unexpectedly announced it would sell two bonds in pesos – due in 2023 and 2026 – at a fixed rate of 16 percent for only four hours.

This bid, along with the attractive 40 percent rate offered by the Lebacs, led investors to behave in the opposite way in which they had been since the economic turbulence began: they started selling dollars to buy pesos and thus subscribe the bonds and buy the mentioned notes.

“I want to highlight we were able to sell the bonds on what was the worst day for emerging markets,” said Caputo in a press conference held yesterday afternoon, making reference to the Fed’s decision of increasing its interest rates. “Its result shows there was willingness to finance the country: we issued a long-term bond in pesos; it’s not like it was a short-term one, and in dollars. It further illustrates the confidence there is in President Macri,” he added.

Investors are currently losing money by buying this bond. But if the Macri administration manages to progressively reduce the inflation rate throughout the years – at least until 2023 and 2026 – its performance will improve in consequence.

According to specialized media, the government will now focus on reducing the fiscal deficit, a key variable at the time of getting investors to keep financing the economic policies the Macri administration wants to implement – and of having the government balance its books.

In fact, when announcing the beginning of the negotiations with the International Monetary Fund (IMF), Treasury Minister Nicolás Dujovne said the government had adjusted its primary fiscal deficit – the one that does not take into account interests from sovereign debt issued – reduction targets from 3.2 percent of the GDP to 2.7 percent. The larger part of these savings will come from halting public works the Federal Government had projected for this year.