Does the mild depreciation of the peso after the (partial) elimination of the cepo mean that the peso is no longer overvalued?

ARGENTINA - In Brief 01 May 2025 by Joaquin Cottani

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In a recent report (see https://globalsourcepartners.c...), I explained the analytical difference between the nominal exchange rate (NER) and the real one (RER) for those who needed a refresher tutorial on the subject. In short, the NER is the relative price between two assets (foreign and domestic) while the RER is the relative price between two baskets of goods and services (tradables and nontradables). A corollary of this analytical distinction is that the NER can be momentarily in equilibrium even if the RER is not. The simple reason is that the equilibrium NER and the equilibrium RER are determined in two different markets. Putting aside the issue that the NER currently observed in Argentina (around 1,200 pesos per dollar) is not necessarily in equilibrium because the cepo has been lifted only partially, let's assume that it is in equilibrium. What is, clearly, not in equilibrium is the RER, whose value is below the level that equates nontradables and tradables supplies and demands, as evidenced by the simultaneous occurrence of a negative output gap and a current account deficit. This double macroeconomic imbalance was present before April 16 and is present now because nothing changed on April 16 that made the real economy more externally competitive now than it was then. To elaborate: Under current conditions, aggregate domestic spending (consumption and real investment, both private and public) is likely below national income meaning that there should be a current account surplus. The fact that there is a deficit and, in addition, the output gap is negative suggests that tradables are relatively cheap and nontradables are relatively expensive, calling for an in...