Argentina: Currency restrictions pose a threat to control
Controls boosting black market and run on banks; Venezuela-style parallel currency feared
New exchange rate controls in Argentina have led to the creation of a black market for the dollar. Experts fear that if the government does not act to control inflation, the parallel currency market could become as important as the one in Venezuela.
At the start of November, the government introduced a range of new measures to try to stem big dollar outflows: first, it forced oil, gas, and mining companies to repatriate 100% of their foreign-currency earnings; secondly, it made insurance companies sell all their foreign assets and repatriate the profits; and, thirdly, individuals now need official approval to buy dollars in Argentina and this is contingent on previous tax declarations proving sufficient income.
After the introduction of the new controls, in November the official exchange rate barely changed, from Ps4.26 to Ps4.28 to the US dollar. The black market rate increased from Ps4.45 to Ps4.75 and at one point exceeded Ps5.
The measures risk reducing bank depositors’ confidence – which was already at a historical low – even further (most deposits are of a transactional and short-term nature). The new regulation also increases banks’ cost of funding, which could dent banks’ profitability and lead to lending drying up. The Badlar rate, the average interest rate paid on wholesale bank deposits, was largely flat during the first half of 2011 at 11%, according to Fitch. However, it started to increase in September and spiked in October at 20%, mostly because of heightened exchange-rate volatility.
Experts are also concerned that the government’s move to oblige oil, gas and mining companies to repatriate 100% of their foreign-currency earnings might deter foreign investment in those sectors. Before the change, oil and natural gas companies could keep up to 70% of their export proceeds offshore and mining companies up to 100%. The move led Fitch to lower the credit ratings of five companies with exposure to the sectors, including Pan American Energy and Petrobras Argentina.
|"The government needs a
trade surplus of $10 billion
a year just to finance itself.
With the latest measures,
the government is jumping
onto the effects rather than
Mining has been one of the industrial sectors that has attracted the most foreign investment during the past 15 years. However, that might diminish if investors perceive that the government is changing the rules of the game. Martin Redrado, governor of Argentina’s central bank between 2004 and 2010 and now chairman of Fundación Capital, a think-tank he founded in 1994, says: "There is a scarcity of dollars in Argentina. This is the result of an inconsistency between the exchange rate policy and the rest of government policy, including public-sector expenditures. The government needs a trade surplus of $10 billion a year just to finance itself. With the latest measures, the government is jumping onto the effects rather than the causes."
Redrado says that for the first time importers also now require permission from the secretary of commerce to obtain dollars to pay for imports. He says that the government does not want to create a parallel currency along Venezuelan lines but that could develop nonetheless.
"This is the first time since convertibility ended in 2002 that an important spread has emerged between the official and unofficial exchange rates for the dollar," Redrado adds. "The country has had a managed floating rate since 2002 but now we are entering a new phase where the government has control of the dollars in the system and can decide who to allocate them to."
Furthermore, the new measures seem to have converted what started out as a run on the peso into a run on Argentine banks, as many people withdraw dollars from the banking system. This seems to have intensified the haemorrhaging of the central bank’s reserves, which fell to $46 billion at the end of November from $47.5 billion at the end of October (overall, total reserves dropped by $5 billion for the year to November 8).
"The biggest problem in Argentina is high inflation, which has been running at more than 20% a year during the past couple of years," says Alberto Ramos, Argentina analyst at Goldman Sachs. "Rather than implementing orthodox macroeconomic measures to bring inflation down, the government has used the exchange rate as the main anchor. However, the peso has depreciated by only 5% or 6%, meaning that in real terms there has been a significant appreciation of the peso.
"People became concerned that the macroeconomic policies are not sustainable and that led to significant capital outflows last year. The government has introduced the latest measures to try to rein this in but it runs the risk of setting up a strong parallel market for the peso."
Ramos says the situation in Argentina is not yet as bad as the one in Venezuela, where officially there are Bs4.30 to the dollar but on the black market people can get up to Bs8.50. However, no ceiling has appeared yet for the peso’s unofficial exchange rate and, unless the authorities take more orthodox measures, the country could follow in Venezuela’s direction.
"Venezuela has a very dysfunctional economy and it would take a long time to remedy that," says Ramos. "Argentina’s situation is much more manageable, but it must take action to stop the run on dollar deposits."