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Temas Públicos
Nº 862 -
www.lyd.org- Email:[email protected]
March, 28, 2008
ISSN 0717-1528
Dollar: There is Nothing We Can Do?
The evolution in the exchange rate has
been one of the most analyzed matters in the
economic scenario of developing countries,
both due to the discussion on the most convenient exchange system and to the evaluation of
the possibility of “dollarizing” internal payments.
Now, the average updated according to
the CPI of the period January 1988 - February
2008 is of $758, which means that the current
value, around $430, would be 43% lower than
the average of the last 20 years, which warns
us about a critical situation for the tradable sector.
The nominal exchange rate decreased
However, economics tells us that simply
dramatically in Chile in the last months and
updating the exchange rate according to the
leaded to a discussion on the real effects of
variation of the CPI is not the correct way for
this path and the possibility that
measuring competitiveness of
the Central Bank interferes the
economy, and recommends
same way Argentina and Brazil
If we want to balance this thus to use a concept named
are doing.
projection, we have the classic Real Exchange Rate (RER).
This discussion arises in
the middle of a generalized
devaluation of the US Dollar,
reason why the situation of the
Chilean currency concerning
other currencies will be discussed, as well as the economic policies that shall be implemented in this situation.
alternatives: more national
savings, more efficiency in all
the sectors and public policies
supporting both alternatives.
If we don’t do anything, the
TCR destiny for 2008 is
already sealed.
In a productive sector, competitiveness is focused in the comparison between local production costs and costs of producers located abroad. Thus, a
productive sector is more competitive if it has less relative
costs.
Well, the level of the current exchange
rate would be near 3.5% under the average
observed in 1990 and the current year (see
graphic N°1), so the difference of 43% already
mentioned would be balanced by the lower
price of inputs imported and the higher efficiency with which the national economy operates. Now, in March we would undergo a new
downturn that would put this indicator near
14% under last year record.
The evolution of the US Dollar v/s
the Chilean Peso
The first problem we face is related to the
correct way to compare the exchange rate value along time, in order to confirm how high or
low it is currently. In fact, if we take the nominal
exchange rate since 1998, the last 20 years,
and we adjust it according to the variation of
the CPI (Consumer Price Index), we found that
the value of the US Dollar in February 1998,
adjusted that way, was equivalent to $1.164.per dollar, and that the lowest value was recorded in February 2008 and reached $467 per
dollar.
On the other hand, there are who affirm
that the measurement made by the Central
Bank of Chile is not the most appropriate and
propose other methods to make that measurement.
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analyze what can be done to avoid the
above mentioned to happen.
Graphic Nº1 Index of real exchange rate
Base 1986 = 100
06
04
02
00
98
96
94
92
90
88
86
Promedio 90-07 = 93,5
What will happen with the downturn of the Real Exchange?
The fall of the TCR means that, in relative terms, it is more convenient to buy goods
and services produced abroad than locally.
This means that the tradable sector is less attractive compared to the non-tradable, and
productive inputs would be mobilized from one
sector to another. Given that the exports basket is quite diverse, tradable sectors of natural
resources are not affected the same way those
that are more intense in the use of labour
force.
The measure informed in the last weeks
is the intervention of the Central Bank in
the exchange issue; which means, that
the issuing agency will buy dollars, increasing its nominal value. Chile did it
one decade ago to protect the exchange
range and that meant gathering a great
amount of international reserves and
issuing bonuses at interests rates each
time higher to avoid the inflationary
pressure that might be developed due to
the increase in the amount of national
currency in the economy. Under the current
conditions, this would increase the gap of low
term rates with other countries, increasing the
dilemma for the Central Bank, or it would relax
inflation.
ene-08
115
110
105
100
95
90
85
80
75
Is it useful that the Central
Bank buys dollars?
Lately, central banks of Brazil and Argentina have bought a great amount of dollars, as
we can see in Graphic N°2.
In Argentina, the reserves raised in
USD$14.4 billion, equivalent to 41% of the reserves they had one year ago. In Brazil, the
increase is even greater, because in the last 12
months the reserves increased in 91.8 billion,
equivalent to 91% of what they had in February
last year; i.e., they almost doubled the foreign
currency stock under the control of the Central
Bank. In Chile, the rate of exchange is almost
nil and the reserves stock has remained quite
stable.
In addition, a higher industrial consolidation would appear, because moderation in
costs generated by a higher operations scale
will boost the concentration of production in
less companies, each time bigger.
The actions taken by the Central Bank of
Brazil did not avoid the appraisal of its currency
if compared to the US Dollar, and in fact, as we
can see in Graphic N°3, in a higher magnitude
than the Chilean peso’s. In Argentina, the situation is different and its currency is even more
devaluated today than one year ago. However,
this does not involve an increasing inflationary
pressure. This, in turn, developed price con-
At worst, we may see the most extreme
version of the Dutch Disease, where the emergency of the an exports area generates such a
downturn of the TCR that dissolves the rest of
the export industry valid until that moment.
As we can see, none of the scenarios is
desirable for Chilean economy, so we must
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duction of the VAT does not particularly help
for this purpose, and even though the rate of
this tax is quite high, reducing it is not a priority.
Graphic Nº2
Evolution of International Reserves
(billion dollars)
250,0
In matters of expenditure, if we consider
that the government expenditure is more intensive in non-tradable goods than the private
expenditure, we would conclude that a moderate attitude in public expenditure leaving
more room for the private sector will contribute to outweigh our loss of competitiveness.
200,0
Brasil
150,0
100,0
Argentina
50,0
Chile
0,0
E F
08
trols over different goods and services that
have distorted even more the Argentinean
economy.
Another example is the port tie-up occurred some days ago, because for many exporters this reflected a decrease of the US Dollar in many more pesos. In an exporting economy as the Chilean, located at thousand kilometres from destination countries, we should
have the most efficient ports of the planet, and
under no circumstance we would have a tie-up.
What can we do then?
The downturn of the TCR is effective and
can create unwanted effects on Chilean economy, but the purchase of US dollars by the issuing agency does not solve the core problem
and generates more serious consequences.
This leads to focus the attention on competitiveness, because the downturn of the TCR
clearly reflects that finally our production
costs increased and this has undermined our
relative position.
105,0
Argentina
100,0
95,0
Chile
90,0
85,0
Brasil
3
F
E 08
D
N
80,0
E 07
At this respect, there are short term
and medium term measures. In the short
term, there is a big opportunity for the authorities to reduce production costs through the
elimination or restructuring of taxes. In that
context, the total elimination of credit tax
would help a lot. Likewise, the modification of
the income tax for companies from an accrued basis would generate a similar effect to
the one proposed by the authority one year
ago, project of accelerated depreciation, that
was rejected by the Congress. Thus, the re-
Graphic Nº3 Index of nominal exchange rate
(base Jan 2007 = 100)
O
D
S
N
A
S O
J
A
J
J
M
J
A
M
M
M A
F
04 05 06 E F
07
However, fiscal and tax modifications
are not the only ones, but also drastic changes in public policies applied to certain areas.
For example, the support to the investment in
hydroelectricity, which will allow in the long
term to have access to a cheaper energy.
This, which goes in the right way, differs from
the initiatives in the labour area, that have developed conflicts and increasing costs.
Conclusion
The grounds of the real exchange rate
are anticipating an important downturn during
this year. This appraisal of the Chilean peso
will affect the real sector.
If we want to balance this projection, we
have the classic alternatives: more national
savings, more efficiency in all the sectors and
public policies supporting both alternatives. If
we don’t do anything, the TCR destiny for 2008
is already sealed.
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