Weekly reforms continue as peso devaluation looms

8th October 2020

By Ignacio Portes

Weekly reforms continue as peso devaluation looms

For foreign observers (and even for many local ones), it’s hard to keep pace with all the new little economic tweaks and reforms being announced each week in Argentina. But it is possible to see the big picture behind all the confusing announcements and understand what could likely come next.

</p> <h2><strong>The latest wave of reforms</strong></h2> <p>Take this last week as an example. Both the <a href="">Economy Ministry</a> and the <a href="">Central Bank</a> announced a new wave of reforms, including:</p> <p>-A reduction (in some cases temporary) of export duties on soybean and its derivate products, biodiesels, mining, industrial products, plus a series of stimulus for small rural exporters.</p> <p>-Yet another layer of <a href="">restrictions</a> on who can buy foreign currency at the official price of 77 pesos per US dollar.</p> <p>-A hike in interest rates for very short-term peso-denominated instruments held by banks, known as <em>pases</em>, similar to the often-discussed <a href="">Leliqs</a>.</p> <p>-The end of the very small, uniform, daily devaluations, which used to mean the official value of the peso moved barely a few cents every week. Instead, there will be a new exchange rate regime that is “more volatile” and “competitive”. On the first day of this new regime’s operation, the peso lost 1 percent of its value in the official market, more than it had in any day since the start of restrictions on foreign currency purchases a year ago.</p> <p>-The elimination of restrictions on foreign currency purchases for firms that make new <a href="">foreign direct investments</a>.</p> <p>-Tax exemptions for those who invest in new construction projects.</p> <p>-Promises of exporting programs for the wine, meat, knowledge, car, oil, gas, textile and metals industries, although nothing concrete was announced in these realms so far.</p> <p>All this might sound like a complex web of changes, but they basically all add up to one goal: to try to stop the run against the Central Bank’s foreign currency reserve without a large-scale devaluation.</p> <p>Making exports slightly more competitive, making imports and foreign currency purchases harder, paying higher interest rates for those willing to bet on peso-based instruments, letting the peso depreciate slightly faster and incentivizing new investments for people who have been holding US dollars: the moves are all clearly tied to the current <a href="">balance of payments</a> crisis.</p> <h2><strong>Unlikely to suffice yet</strong></h2> <p>Sadly, there’s broad agreement that these changes won’t be enough.</p> <p><strong>The government knows that a big devaluation of the official peso-dollar exchange rate</strong>, <a href="">used for imports of foreign goods</a> and foreign debt payments, <strong>would immediately translate into higher prices of goods, energy and other basic products</strong>, and result in a new hike in <a href="">poverty</a> rates, which are already rising to alarming levels. So <strong>it is currently testing the waters on whether these series of stimulus, plus a series of smallish devaluations, could be enough to avoid a large-scale one.</strong></p> <p>But all the evidence points to the fact that it won’t suffice. There have been simply too many pesos printed during the pandemic, and too many would also be needed to be printed in the future due to the snowballing debt in Central Bank instruments such as Leliqs and pases, to expect investors to suddenly start betting on the peso due to a series of small incentives when the gap between the official and the black-market value of the peso is almost 100 percent.</p> <p>&#8220;With so much money printing in the past and in the future, we still believe that Argentina will be forced to do a bigger devaluation to normalize its FX market. It is possible that printing money was inevitable in this year of pandemic, but what is not possible is to pretend that this will not come with a corresponding correction in the country&#8217;s exchange rate. The government can administrate that correction in terms of its timing, or by formalizing the multiple exchange rate regime that already exists de facto in black and grey markets, but the correction per se is unavoidable. It is to be expected that governments try to avoid devaluations knowing their effects on prices, but sometimes they don&#8217;t end up doing what they want, and are forced to do what they can: just ask Macri, who also did his best to avoid the return of foreign exchange restrictions but ended up doing so against his will in late 2019,&#8221; a report from the <a href="">1816 consultancy agency</a> said this week.</p> <h2>Reminiscences of 2013</h2> <p>The current situation has shades of a similar Central Bank crisis that a Kirchnerite government had to contend with.</p> <p>Current Central Bank Chief Miguel Pesce was already its Vice President in 2013, and the so-called “clamp” on foreign currency purchases and imports had already been imposed by one of the monetary authority’s previous leaders, Mercedes Marcó Del Pont, who is <a href="">still an ally of Pesce</a> today from her position at the helm of the AFIP tax bureau.</p> <p>Despite all the restrictions that the Central Bank had placed since 2011, by 2013 it was already running out of foreign currency reserves, as well as running out of ideas about how to administrate that scarcity. Cristina Kirchner’s government banged the drum in saying that money printing had nothing to do with the run against the peso, and said the main reason behind the emptying of USD reserves and the rise in black-market exchange rates was speculation by bad-faith actors in the private sector who wanted to destabilize a popular administration.</p> <p>Behind that noisy rhetoric from the government and government-friendly media, economic officials were looking for ways to avoid the inevitable large-scale devaluation. They tried a couple of ideas: first, they tried to divest Argentines&#8217; attention from the dollar by issuing “dollar-linked” bonds, whose dividends were tied to the peso-dollar exchange rate value at their maturity. They also started a series of mini-devaluations, a few cents per day, to try to make the country’s currency (from which everyone was running away before the big crash they feared) more competitive.</p> <p>Spoiler alert: it didn’t work.</p> <p>Knowing that their USD savings (or in the case of farmers, their stashed crops from the latest harvest, valued in USD) would inevitably be worth a bit more if they held from selling, everyone continued to postpone their exports or dollar sales as much as they could. And importers and peso holders continued doing the opposite: buying anything they could get their hands on as quick as possible to protect their value from the continued peso depreciation. As for the dollar-linked bonds launched by the government, those did raise some interest, but ended up costing the Treasury a lot when they finally had to cave in and devalue strongly, in <a href="">January 2014</a>.</p> <p>Although the conspiracy-minded rhetoric is not (yet) present this time as it was in 2013-2014, the economic scenario is very similar, as is the government’s response. In fact, this week Secretary of Finance also launched a <a href="">new series of dollar-linked bonds</a> just like in 2013, and sold almost USD 2 billion worth of them, as banks tried to put their wads of pesos in something less likely to depreciate.</p> <h2><strong>Mini and maxi devaluations</strong></h2> <p>But the mini-devaluations, the small tax breaks and the small incentives to keep saving in pesos are unlikely to stop the pressure against the currency, just like in 2014. The question is what will the government’s big move be when all the small ones stop buying them a few days of extra time.</p> <p>This week, the Central Bank reportedly saw its <a href="">broke a streak of dozens of consecutive days with massive sales of foreign reserves</a> to keep the official value of the dollar in check, so they might indeed get that little bit of added time before more decisions are needed. But what will happen when pressure inevitably returns?</p> <p>Will Miguel Pesce add even more restrictions on imports to try to sustain the official value of the peso? Or will the government accept the inevitable need for a strong devaluation? And would that devaluation be big enough to fully close the gap with the black market dollar? Or will it come with the formal creation of a dual exchange-rate regime, one heavily restricted and used mostly for internacional commerce, and another free one for financial operations?</p> <p>In any case, knowing Argentina&#8217;s present and past, it&#8217;s easy to know one thing: the peso is unlikely to strengthen in any significant and sustainable way any time soon. In fact, <strong>it is not until after the country resigns itself to the fact that the peso is worth much less than it wishes that its <a href="">economic recoveries</a> usually begin</strong>.</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.