Most economists focus the analysis of the effects of a devaluation on its impact on the relative prices of different goods and services -real exchange rate-, and on external and fiscal accounts.
However, the main initial impact of a devaluation is the loss of value suffered, both in dollars and in purchasing power, by assets denominated in local currency.
This double impact is well known in consumer theory (Slutsky Equation) but is generally ignored in the analysis of the effects of a devaluation.
The patrimonial impact and the consequent transfer of wealth between sectors affects spending decisions, therefore the level of economic activity and, therefore, the external and fiscal accounts are affected.
Experience shows that the equity impact is much faster and more severe than that which could be caused by the depreciation of the real exchange rate.
Furthermore, in the event that the devaluation were passed entirely to prices (devaluation tax) and the real exchange rate returned to its initial level, this would be the only remaining impact of the devaluation.
The assets of Argentines take the form of holdings of financial assets (banknotes and coins, deposits, bonds, mutual funds, shares in pension funds - sustainability guarantee fund (FGS) - and reserves of insurance companies), real estate, ownership interests in companies, and other assets.
Some of these assets are valued in pesos and others in dollars, and they may be in the country or abroad.
When estimating the value of holdings of these assets, great care must be taken not to include some holdings twice, for example deposits.
The banks receive deposits, but only part of them are allocated to loans to the private sector, the rest is kept in the form of reserves, or used to purchase Treasury or Central Bank bonds (the famous leliqs and passes).
Similarly, mutual investment funds, the FGS and insurance companies have among their assets instruments that are liabilities of others in these same sectors.
Taking all these factors into consideration, it is possible to estimate that at the end of November 2023, Argentines had assets denominated in pesos with a value equivalent to USD 160,000M.
The devaluation of December 13 reduced the value of these assets to USD 71,000M, that is, a loss for the holders of these assets of USD 89,000M, equivalent to more than 15 percentage points of GDP.
Who benefited?
The Treasury (its debt measured in dollars fell from USD425,000M to USD371,000M), the Central Bank (its liabilities were reduced by USD70,000M, however, its assets were also reduced by USD57,000M due to its holdings of bonds of the Treasury), and private debtors in pesos.
What are the economic impacts of this brutal wealth transfer?
At first none, except anger at the realization of the property losses suffered.
However, these holdings fulfilled an economic function, so economic agents always tend to rebuild part of their eroded purchasing power.
To do this, they nominally increase the demand for some of these assets, for which they must sacrifice spending.
By the end of December, these holdings had recomposed to reach USD 90,000M.
This recomposition in asset holdings of USD 19,000M explains, together with the fiscal adjustment, the drop in demand that most economic sectors are experiencing and, consequently, the reduction in imports.
This situation always occurs after a devaluation, and is only reversed when the improvement in confidence translates into an inflow (or lower outflow) of capital.
The drop in real wages (improvement in the real exchange rate) explains why consumption falls more.
This impact is amplified by its effects on deposits and credits.
Since the devaluation, private deposits in pesos grew $14.2b (50.6%), while credit to the private sector only grew $2.9b;
the differential being allocated to the purchase of public securities.
Although this behavior is partially explained by the recession itself, it also amplifies it, ratifying a fundamental concept in economics: the growth of deposits contracts aggregate demand while the growth of credit expands it.
Historical experience also teaches us that if confidence improves, economic activity also gradually recovers.
Experience also shows us that improvements in the trade balance are not usually the result of the devaluation of exports, since their impacts are slow, but rather are a reflection of the decline in imports, a consequence of the contraction of spending.
As economic activity recovers, the initial improvement in external accounts is diluted.
However, the real improvements occur in the capital account, as confidence is restored.
The evolution of the different variables in the last three months shows that this process is in full development.
Ricardo Arriazu is an economist