Central Bank currency controls could get stricter next week

24th October 2019

By Ignacio Portes

Central Bank currency controls could get stricter next week

Pick the metaphor you want: hanging by a thread, close to collapse, on its way down. Almost no one would deny the fragile state of Argentina’s finances. But the moment of truth might be about to come, as the Central Bank and the Economy Ministry have made it an unspoken priority to maintain as much stability as possible until the day of the presidential election, which is coming this Sunday.

</p> <p>Economy Minister Hernán Lacunza <a href="">defaulted part of Argentina&#8217;s debt</a> and <a href="">banned companies from purchasing foreign currency</a>, while Central Bank chief Guido Sandleris has been selling US dollars left and right on a daily basis. All this had a similar goal in mind: preventing a <a href="">new decline</a> in the official value of the peso, with its consequences on prices and on Argentines&#8217; perception of the crisis.</p> <p>After the results are announced, especially if the first round Fernández victory is confirmed, the reality of a Central Bank <a href="">bleeding millions in assets every day</a>, as well as that of an ever-growing currency black market, will need to be faced.</p> <h2>The precedent of August</h2> <p>The situation has some similarities with what Argentina saw in the build up to August&#8217;s primaries. During the campaign, Fernández repeatedly accused Macri of artificially propping up the exchange rate through high interest rates and hard currency sales in order to favor his chances of winning, at the expense of damaging the country&#8217;s public finances and productive capacities.</p> <p>On the Monday after his shock win, the peso <a href="">melted</a> from a 45 per US dollar to an intra-day high of 62. This was partly explained by the win of the candidate that those invested in Argentine assets favored the less, but some in Fernández&#8217;s team believed that a pre market open meeting on Monday morning between Macri and Sandleris also had <a href="">much to do with the peso&#8217;s abrupt plunge</a>, as the Central Bank changed strategy and decided to reduce intervention when trading began (although the monetary authority ended up raising interest rates later that day).</p> <p>&#8220;I hope Macri doesn&#8217;t get mad again this Monday, liberating the dollar like the last time,&#8221; Fernández <a href="">said</a> this week.</p> <h2>When the levee breaks</h2> <p>But although the timing of Macri&#8217;s selective interventions might be questioned as politically motivated, some bigger forces are at play that neither Macri nor Fernández will be able to contain at will.</p> <p>Argentina&#8217;s large debt, both internal and external, in dollars and in pesos, coupled with a stagnant economy with very little room to finance new expenses but <a href="">growing social demands</a>, means that the pressure against the peso can only be contained for so long.</p> <p>Lacunza&#8217;s decision to postpone payments of peso-denominated liabilities was aimed at stopping those cashing them in from running to the bank to swap those bills for US dollars. The &#8220;clamp&#8221; against dollar purchases can be similarly explained, as well as many other small moves during the last few weeks: taking funds from the <a href="">ANSES social security agency</a>, forcing the state-owned <a href="">Banco Nación to loan money</a> to the Treasury, etc.</p> <p>Eventually, however, the levee against the flood of pesos into the market won&#8217;t resist the growing pressure. On Wednesday, the Central Bank <a href="">sold more than US$500 million</a>, a record for the month, and also showed up with more than US$200 million worth of contracts in the currency futures market after several weeks of non intervention. The black-market dollar, meanwhile, soared to 69 pesos, while the blue-chip swap exchange rate, which some use to take assets out of the country, briefly reached 80 per dollar.</p> <p>Since August 12, the day after the primary vote, the Central Bank has lost an alarming <a href="">US$20 billion in currency reserves</a>, a clearly unsustainable sum, even in the short term. The monetary authority even started using up the last &#8220;untouchable&#8221; portion of the IMF loans in order to <a href="">pay debts</a>, freeing up other dollars to satisfy savers&#8217; and importers&#8217; appetites for hard currency, and even re-hired old experts from the Kirchnerite era who specialize in stopping currency leakage. But to no avail so far.</p> <h2><strong>What next</strong></h2> <p><a href="">Multiple</a> <a href="">experts</a> from different orientations believe that the restrictions on currency exchange will be reformed shortly after the vote.</p> <p>Some see the limit of US$10,000 dollars per person per month as likely to shrink to US$2,000 or less, making it harder for people to buy at the official rate and then sell in the black market, a practice that is bleeding the Central Bank of its reserves.</p> <p>Others believe that means-testing could be back, so that savers will not be able to purchase more than what the AFIP tax bureau think that they are likely to afford per month. New taxes to spending abroad are also seen as a possibility.</p> <p>There&#8217;s also conjecture about a multiple exchange regime, with two official prices: the cheaper one, used by importers, and with a strong effect on inflation, will be restricted, and the second one will be free. This dual system, with a &#8220;commercial&#8221; and a &#8220;financial&#8221; exchange rate, has been used by Argentina in years past, and it might put an end to black markets, although it would also leave the door open to some abuses linked to who controls the authorizations to use each exchange rate, a source of immense power in countries like Venezuela.</p> <h2>Transition conflicts</h2> <p>If Fernández wins, however, Macri will still be the president over the next six weeks, so tension between the outgoing and incoming administrations could return, just as we saw after the primaries.</p> <p>Some see Lacunza and Sandleris as potential middlemen, as both have contacts with prominent <em>Frente de Todos</em> members or advisers. According to reports in the financial press, stricter restrictions on the purchase of hard currency might be on the pipeline, a decision that might keep Fernández happier.</p> <p>Macri will try to get to December 10 with as much of a semblance of normalcy as possible, preserving his future political capital by averting the worse effects of the crisis during his remaining time in charge, similarly to what rival Cristina Fernández de Kirchner did in 2015. Alberto Fernández, meanwhile, fears finding the Central Bank&#8217;s coffers empty by the time he takes office.</p> <p>Everyone is holding their cards close to their chest, but the opening moves of this month-long financial clash might come on Sunday night, during the victory and concession speeches.</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.