beyondbrics

“In a few days’ time, all this will seem fleeting and temporary.” So says Amado Boudou, Argentina’s economy minister and vice president-elect, of the pressure on the peso and mounting capital flight, which led the government to introduce foreign exchange controls this week.

The market thinks otherwise. It patently does not buy Boudou’s argument that there won’t be a devaluation from the current rate of 4.265 pesos to the dollar.

On Monday, the first day on which customers seeking to buy dollars (whatever the amount) needed to be granted prior approval from the tax agency, the informal dollar rate strengthened 5.1 per cent to a record 4.70 pesos. Investors buying bonds locally in pesos and selling them abroad in dollars – the so-called contado con liquidación operation – also paid a record 5.10 pesos per dollar, a 5.4 per cent rise.

This is despite the central bank selling $100m on Monday. The government said $80m of that corresponded to trade exchange and only $20m was needed to back up demand for dollars.

It is not the first time the government of Cristina Fernández has sought to bend the market’s will to its own. The raft of measures announced last week to boost the amount of dollars in the system (including requiring mining and oil companies to repatriate export revenue and insurance companies to sell foreign investments and repatriate the proceeds by the end of the year) will buy time but look unlikely to solve the root of the problem. Argentines find the dollar cheap relative to the peso, in part because of inflation estimated currently at around 25 per cent.

Sebastián Vargas of Barclays Capital, downgraded his 2011 and 2012 growth forecasts for Argentina on Tuesday as a result. In a note to clients, he wrote:

The administration’s diagnosis continues to be that more controls are the way to go, instead of an orderly depreciation of the peso. More measures should therefore be expected, as well as higher volatility and higher interest rates. (As we have signalled) difficulties in adjusting the exchange rate would pose great risks to the economy, a risk that looks increasingly real. We are downgrading growth prospects to 8.2 per cent in 2011 and 3.4 per cent in 2012 due to this and are turning increasingly less constructive on Argentina, given the government’s demonstrated difficulties in engineering a much-needed peso depreciation, a process that we expected to be smooth.

The Argentine central bank is forecasting growth of 9 per cent this year and the government has pencilled in 5.1 per cent next year. (The draft budget also forecasts a 2012 dollar rate of 4.4 pesos.)

What form could any new measures take, if the current ones prove insufficient? El Cronista Comercial business newspaper says the government is studying a temporary ban on foreign multinationals – including banks and oil companies – sending remittances abroad. The economy ministry dismissed such talk and the central bank said it had no information on the subject.

The problem is, as RBS Securities put it in a research note, “regulation feeds into fear of more regulation”. As analyst Flavia Cattan-Naslausky wrote:

Without an economic stabilisation plan that anchors fiscal policy as the only effective approach to contain inflation pressures and stabilize the exchange rate, stricter capital controls will most likely be necessary. The capital flight eventually finds another outlet, but not without adverse inflationary side-effects … More pressure ahead.

Related reading:
Argentina: let the dollar hunt begin, beyondbrics
Cristina: putting the squeeze on oil and mining, beyondbrics
Argentina: Cristina’s Catch-22, beyondbrics
Argentina: A high-risk recovery, FT
Argentina’s economic recovery, FT