Will Macri’s currency controls stop the dollar leakage?

5th September 2019

By Ignacio Portes

Will Macri’s currency controls stop the dollar leakage?

During his 2015 presidential campaign, Mauricio Macri and his economic team told everyone who asked that the ban on foreign currency trade imposed by Kirchnerismo would be very easy to lift, promising to do so on day one of his presidency, in contrast to other candidates who argued this could be harder.

After becoming elected, Macri delivered within his first week in charge, using high interest rates and foreign currency loans to make sure that the lifting of the restrictions would not result in a run against the peso.

But luck has turned for the country’s leader since his ease to raise debt in global markets disappeared in 2018. And despite resisting up to the last minute before announcing the return of the dreaded “cepo,” Macri finally gave up. On Sunday, his government re-imposed a ban on companies to buy dollars with their pesos, moving forward with what he continues to believe is a bad idea.

</p> <p>The restrictions are so far milder than those in the late-Kirchnerite era, and the decree imposing them also says they are only temporary, up to December 31. But experts fear the dynamic of the crisis means its possible that regulations could eventually get tighter, as well as last longer in time.</p> <h2>Dollars in quicker, Dollars out slower</h2> <p>The new regulations are complex, and a detailed read of the <a href="">government decree</a> and <a href="">Central Bank resolution</a> is necessary to understand all of its fine print. But its central aim is to force exporters to sell their dollars in Argentina at a faster pace, while also forcing importers and others demanding foreign currency to do so more slowly.</p> <p>In the years since taking office, Macri&#8217;s government liberalized the restrictions on grain exporters greatly, allowing them to wait up to several years if needed before selling the dollar proceeds from their exports at home. The administration has now turned course, and exporters will have only 5 days after the transaction abroad is finished to liquidate their dollars, as well as a 180-day limit since the <a href="">shipping authorization</a> is issued.</p> <p>According to economist Fausto Spotorno, this regulation on the supply of dollars would not mean much if it wasn&#8217;t combined with regulation regarding demand for foreign currency in Argentina. Otherwise, exporters would sell their dollars for pesos during the 5-day window only to re-purchase them immediately after. This is part of the reason for the other side of the regulation: limiting dollar buys.</p> <p>The decree says companies are now fully banned from purchasing foreign currency, while individuals can only buy up to USD 10,000 per month. This artificially boosts the demand for pesos, at a time in which Argentine firms and individuals were increasingly scrambling to get rid of them, moving against President Mauricio Macri&#8217;s political goal of propping up the value of the currency.</p> <h2><strong>Less Kafkaesque</strong></h2> <p>The government has been trying to make a point regarding the differences between the current restrictions and those of Cristina Fernández de Kirchner&#8217;s last term in office.</p> <p>The most obvious change is that 98 percent of individuals won&#8217;t be directly affected by the ban, as most Argentines do not have the purchasing power to buy more than USD 10,000 per month.</p> <p>During the Kirchnerite &#8220;cepo&#8221; on currency exchange, individual savers had to undergo a series of Kafkaesque bureaucratic authorizations before getting the green-light to buy a certain amount. In practice, this meant that only the richest 10 percent were allowed to buy (as the AFIP tax bureau said those with less income did not have the means to do so), and that only a small percentage of their salaries was cleared to purchase dollars.</p> <p>Macri&#8217;s new regulations do not require authorization to buy foreign currency for trips abroad or for savings, as long as the USD 10,000 monthly limit isn&#8217;t breached.</p> <p>Crucially, companies will also be free from any restrictions to import goods or machinery from abroad. While the limits on savings and tourism were the most irritating for the Argentine middle classes during the Kirchnerite era, the limits on company&#8217;s imports were arguably more damaging for the economy overall, as firms struggled for spare parts and some patients even faced problems with imported drugs, while opportunities for corruption increased at the country&#8217;s customs bureau.</p> <p>Still, foreign firms will also be forced to ask for authorization from the country&#8217;s Central bank before sending dividends back to their home countries — a potentially troublesome issue if the country wants to attract more foreign investment.</p> <h2><strong>Black market arbitrage</strong></h2> <p>Although restrictions might stop the bleeding of dollars in the short term, the underlying imbalances are likely to manifest in new ways.</p> <p>In the days since the introduction of the ban, black and grey markets already re-appeared. Companies began using Kirchnerite-era techniques such as the blue-chip swap, which consists of buying a bond or stock that trades at home and abroad with pesos to sell them afterwards in dollars. This allows them to move money out of the country (into a New York bank account, for example) by paying an extra implicit fee between what they buy at home and what they sell abroad.</p> <p>While the official exchange rate is now trading at 56 pesos per dollar, down from a peak of more than 60 a few days ago, the US dollar&#8217;s implicit price in those blue-chip swap transactions is still above 60 pesos.</p> <p>In downtown Buenos Aires, savers can also buy or sell dollars with no limit at a premium, visiting the underground exchange houses informally known as &#8220;cuevas.&#8221; The cuevas are also offering dollars at prices near those of the blue-chip swap.</p> <h2><strong>Far from equilibrium</strong></h2> <p>While Lacunza has played down the significance of these grey and black markets, they present an implicit risk for the government&#8217;s new regulations. If the gap between the formal and informal exchange rate grows, the incentives for arbitrage (buying at the official rate to sell afterwards in black markets) will also grow, a fact that can quickly lead to the depletion of currency reserves, bringing us back to square one.</p> <p>During the Kirchnerite era, the gap between both rates was higher than 50 percent. In places such as Venezuela, it has reached significantly worse figures, leading to widespread scarcity in regulated markets. While Macri&#8217;s &#8220;cepo&#8221; is not there yet, the possibility of things getting worse is impossible to ignore. The fact that the Central Bank has continued to sell dollars since the introduction of the reforms on Monday (although at a much slower pace) seems to suggest that Argentina&#8217;s foreign sector is still far from reaching equilibrium.</p> <p>

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Ignacio Portes

Ignacio Portes is The Essential's General Editor. Former Economy editor at the Buenos Aires Herald, he has also written for publications such as Naked Capitalism, NSFWCorp and Revista Debate.