Economy

The peso’s bounceback is unlikely to last for long

31st October 2019

By Ignacio Portes

The peso’s bounceback is unlikely to last for long

After holding on to a “lite” version of currency exchange restrictions during campaign season, President Mauricio Macri’s administration took note of the dramatic loss of Central Bank reserves seen during the last few weeks and tightened the rules for legally purchasing US dollars in Argentina, taking them close to the max.

</p> <p>Barely an hour after the first official results of Sunday’s presidential election were published, the government leaked news that <a href="https://www.perfil.com/noticias/economia/cepo-total-solo-se-podran-comprar-200-dolares-por-mes.phtml">only USD 200 per person per month will be authorized</a>, down from a USD 10,000 limit imposed two months ago. On a press conference on Monday, the news was confirmed.</p> <p>“In response to the surge in dollar buying by individuals seen last week, and considering the risks of seeing the trend continuing this week, we decided on these new controls, even if we know that they come at a cost to the Argentine economy,” Central Bank chief Guido Sandleris <a href="https://www.youtube.com/watch?v=B3Zk7vFgR24">said</a> before market open.</p> <p>Companies remain banned from buying dollars, although all imports can still be done at the official exchange rate, a crucial fact to keep the most basic mechanics of the economy from also failing.</p> <h2><strong>Outgoing and incoming</strong></h2> <p>Macri believes that his decline in popularity has been linked to the currency devaluations seen since early 2018, when the peso stood at 18.5 per US dollar (it currently stands near 60). In light of this, he has opted to walk back on one of the central promises of his 2015 campaign: freeing currency markets.</p> <p>After his strong primary defeat, he re-imposed some of those restrictions. But those partial restrictions left strong incentives for individuals to buy the maximum amount of dollars available (up to 10.000 per month) only to re-sell them in the black markets for a premium. This practice was draining the Central Bank’s reserves, and mostly serving to subsidize speculation.</p> <p>As soon as the election ended, Sandleris rolled out much harsher restrictions, very similar to the so-called “clamp” on currency transactions imposed by Cristina Kirchner’s administration between 2011 and 2015.</p> <p>Sandleris argued the decision was done with the goal of leaving greater degrees of freedom available for the next administration to apply its own economic policies. Still, Fernández’s camp was not too happy. The president elect’s key ally Sergio Massa said Sandleris’ policy over the past two months amounted to “USD 10,000 dollar worth of political patronage” for their potential voters.</p> <p>UNDAV economist Sergio Chouza seemed to agree: &#8220;the absurd 10,000 figure was done with the election in mind. Changing it the day after the election was very costly for the Central Bank reserves,&#8221; he argued.</p> <h2><strong>Dollar down, but not for long</strong></h2> <p>After Sandleris’ announcement, the peso regained strength in the official, grey and black markets. According to experts, both large-scale investors and individuals dollarized their portfolio as much as they could in the build up to the election, knowing that the cheap and easily available dollars could stop being available after the vote, similarly to what happened <a href="https://gettheessential.com/economy/2019/08/15/argentina-macri-debt-election-recession-inflation-leliq-bonds-stocks">after the primaries</a>.</p> <p>The increased restrictions after Sunday meant that the peso’s selling pressure in the official market was drastically reduced, making the battered Argentine currency recover 1 percent of its value. In black markets, meanwhile, “those who dollarized last week started to unload, and that made prices go down,” according to market analyst Christian Buteler.</p> <p>But the 10 percent drop in prices seen between Monday and Tuesday is likely to be a mere glitch caused by short-term liquidity issues. “The logic indicates that the <a href="https://gettheessential.com/economy/2019/09/12/infographic-the-return-of-the-exchange-rate-gap">gap</a> between the official and black markets will end up growing in the long run, as the restrictions are now bigger,” Buteler <a href="https://www.ambito.com/dolar-hoy-por-que-el-blue-se-derrumbo-7-n5062530">said</a>. The black-market dollar is currently trading at 67 pesos, while the blue-chip swap dollar used to exit Argentine markets and move money abroad stands near 80.</p> <h2><strong>More circulating pesos</strong></h2> <p>The pressure on the exchange rate (and on inflation figures) will be exacerbated by other changes in monetary policy seen since Monday, but which have flown under the radar.</p> <p>To start with, Macri’s administration <a href="https://www.baenegocios.com/economia-finanzas/El-Gobierno-podra-usar-hasta-400.000-millones-de-emision-monetaria-para-cubrir-el-deficit-20191030-0081.html">published a decree</a> authorizing up to 400 billion pesos (6.5 billion dollars) in money printing to cover deficit spending. Although specialists believe the government might not end up using the full amount, the decision is yet another violation of the economic program agreed with the International Monetary Fund, in which the Treasury promised not to resort to Central Bank financing.</p> <p>This could also be seen as an anticipation of Fernández’s policy, whose advisers have suggested that they might <a href="https://gettheessential.com/economy/2019/10/24/alberto-fernandez-economists-money-printing-inflation-argentina">resort to money printing</a> in a more pragmatic way, using it when necessary to plug fiscal gaps.</p> <p>In addition to this, the Central Bank lowered the floor rate of its short-term, peso-denominated benchmark Leliq note <a href="http://www.bcra.gov.ar/Noticias/Decisiones-del-Comite-de-Politica-Monetaria-301019.asp">from 68 to 63 percent</a>, while also <a href="https://www.cronista.com/finanzasmercados/Limitaran-el-uso-de-Leliq-en-encajes-bancarios-para-fomentar-una-baja-de-tasas-20191028-0074.html">trimming</a> the amount of Leliq notes that banks can hold in their books.</p> <p>These two decisions mean there’s less incentive to hold Leliqs, which some analysts see as akin to toxic assets, as they are only supported by a Central Bank that is close to bankrupt. As a consequence, banks are likely to lower the rates they offer for their clients’ peso deposits.</p> <p>Ultimately, with Leliqs and peso deposits offering smaller interest rates amid rising inflation, the increasing amount of pesos in the Argentine economy might start chasing foreign currency (in legal or illegal markets) as well as any available goods, stoking the country’s exchange rate and inflation figures even further.</p> <p>“The Treasury needs to cover 250 billion pesos worth of deficit between now and December. That is 18 percent of Argentina’s monetary base,” Eco Go analyst Federico Furiase <a href="https://www.youtube.com/watch?v=0ExIBOvB4Kk">said</a>. “With the clamp on the official exchange rate, the official value of the dollar might be contained. But the gap with the black-market dollar will surge, as will inflation.”</p> <h2><strong>Regulated prices now also up</strong></h2> <p>With the election season over, the Argentine worker is now bracing for <a href="https://www.ambito.com/cuales-son-las-subas-precios-y-tarifas-que-se-vienen-las-proximas-semanas-n5062892">more bad news</a>.</p> <p>Gasoline prices will be unfrozen, and hikes in electricity and natural gas tariffs were also put into motion by the outgoing administration, and will be applied in the coming weeks and months.</p> <p>As for food prices, <a href="https://www.cronista.com/economiapolitica/Adelantan-subas-en-consumo-masivo-por-devaluacion-y-futuros-congelamientos-20191023-0062.html">reports</a> say industry leaders are hiking them pre-emptively, in the build up to a price-salary agreement that the President-elect might want to sign with them after taking office.</p> <p>Emergency measures abound, but hard times are likely to continue for the general population.</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.