The six risks of the peso’s exchange rate gap
The restrictions on currency exchange in Argentina have led to the appearance of parallel grey and black currency markets, in which purchasing a US dollar can cost twice as many pesos when compared to the official market. This growing gap between exchange rates creates many short-term risks for the Argentine economy, so let’s dive into them and see some of the concrete issues that the country is facing.
No dollar sales
The first problem that emerges when the gap between both exchange rates grows is that exporters start withholding the proceeds of their sales abroad, which are the only source of US dollars that the Argentine economy has at its official price of 69 pesos per USD.
Exporters sell their goods and services abroad and get paid in US dollars, which they are obliged to bring into the country and sell for pesos. But when the difference between the official exchange rate and its black- or grey-market value is as large as it has been lately (reaching more than 130 pesos at times), exporters start expecting that the official rate will sooner or later catch up to the alternatives, and thus try to restrict their conversion of dollars to pesos as much as possible.
Foreign trade speculation
The gap also leads to all kinds of irregularities and speculative maneuvers with regards to foreign trade.
Importers, who are the only group that can access dollars at its 69 peso official value, have all kind of incentives to overbill their imports (declaring more than what they are actually purchasing) or buy months of inventory in advance in order to get the largest amount of cheap Central Bank dollars as possible.
Exporters have a similar but opposite incentive: sell as little as possible or underbill their sales, leaving some of the dollars they collect outside of the country, far from the radar of the Central Bank or the AFIP tax bureau. This is because any dollar outside of the Argentine system is worth more than inside it given the gap in the dual exchange rate.
Runs against the peso
The third problem is that the demand for dollars from Argentine savers soars, be it from people who have their pesos inside the banking system or outside of it. This has led the Central Bank to raise interest rates floors for peso depositors over the last few days, as it fears those deposits could otherwise be channeled towards more dollar buying, both from companies and from individuals.
The interest rates offered by the Central Bank to the commercial banks that own its notes are still significantly below the 45 percent yearly inflation figures, but forcing commercial banks to put a floor to the interest rates that they offer for their clients’ deposits is an attempt at stopping those clients from running towards the black-market dollar as the hiding place for their savings.
A fourth consequence of the gap between exchange rates is that it pushes those who have dollar-denominated savings in Argentine banks to withdraw them from the system, placing them instead in safe deposit boxes or hiding them at home under the mattress.
Those US dollars are worth much more outside the Argentine banking system than inside it. A dollar in a savings account can only be converted to pesos at a 68 to 1 exchange rate, while a dollar outside the banking system can be swapped for more than 120 pesos, so this is another incentive to get the money out from the banks.
The data shows that since banks re-opened mid-way through the lockdown on April 20, 1 billion dollars were taken out from the system from retail investors in just 20 days. This is not a mass-scale withdrawal like the one we saw at some moments in the past, but it is still a data point that should be followed closely. If the exchange-rate gap continues to grow and reaches figures beyond 100 percent, withdrawals of dollar deposits are also likely to accelerate.
A fifth aspect of the gap is that it creates a massive incentive for retailers to buy at the official rate (plus the new 30 percent tax on dollar purchases, which results in a 90-to-1 rate for retail savers in practice) and then turn around and sell those dollars for a profit.
Even with the limits that the “clamp” on currency exchange imposes on dollar purchases, retailers can buy the 200 dollars per month authorized by the Central Bank for a total cost of 18,000 pesos, and then sell them in the black-market for 24,000 pesos, making an instant profit of 6,000 pesos through a single transaction. This can be done every month and allows for incredibly attractive returns for those who know how to do it, draining the Central Bank of its foreign currency reserves on the cheap.
Finally, as a corollary to all the preceding points, the worry that starts to spread amid business owners is that if a devaluation is inevitably coming, then it’s time to preemptively raise the prices they are charging the public for their products. If they don’t raise prices for products whose value is at least partly tied to the official exchange rate (like imported goods, or products with imported components), they run the risk of not being able to replace their inventories if the Central Bank stops selling dollars on the cheap.
Although there is no direct relationship between the black-market value of the dollar and domestic inflation (which is more closely correlated to the official value of the dollar), it’s obvious that if the alternative exchange rates keep shooting up, eventually the official peso-dollar rate will have to catch up with it. So store owners start pushing their prices up to account for that risk.
And considering that Argentina’s largest trading partner (Brazil) strongly devaluated its currency in 2020 as well, then there is even more competitive pressure piling up against Argentina’s exchange rate, despite all the restrictions to try to prop it up.
The need for a plan
To sum up, these six exchange rate-related risks need to be neutralized quickly, and for that the government will have to create some economic certainty. This can be done through a successful debt restructuring deal with private bondholders, plus the presentation of an integral economic plan with consistent fiscal and monetary goals. The government needs to create a roadmap to get out of this deep economic crisis which, after two years of massive economic imbalances leading to a deep recession, has only become more uncertain with the lockdown.