Tags: Argentina | dollar | inflation | Fernandez

Argentina Limits Dollar Buying on First Day of Relaxed Controls

Monday, 27 January 2014 10:24 AM

Argentina set monthly limits on dollar purchases on Monday, keeping restraints on a currency market that it unexpectedly loosened last week in a move that battered the peso and jolted emerging markets globally.

By restricting Argentines to buying $2,000 per month, the government revived doubts about its commitment to a more liberal currency market. The official peso still trades at a premium of more than 30 percent to the black-market exchange rate.

"This is a relief but it's not freedom. In practice, it gives just a little escape." said economist Rodolfo Rossi in Buenos Aires. "The pressure on the (black-market peso) is going to continue."

The plunging exchange rate has also raised economists' concerns that more costly imports will add to price pressures in a country that already has one of the world's highest inflation rates. But officials were quick to dismiss such risks.

"There is no reason that the exchange rate should distort consumer prices," said Cabinet Chief Jorge Capitanich in a press conference detailing the new regulations. "Lots of businesses just raise their prices out of uncertainty."

Shopkeepers around the country hurriedly placed new price tags over the weekend on imported items from Cuban cigars to Asia-made televisions, reflecting a more than 20 percent drop in the official peso rate in recent days. The price surge followed the government's decision to lift a two-year-old ban on Argentines buying foreign currency, allowing savers access to coveted U.S. dollars and leaving the peso to plummet.

The relaxation of controls came as central bank reserves fell beneath $30 billion, a level suggesting its interventions in support of the anemic peso had become unsustainable. But allowing average wage-earners to access U.S. dollars was sure to pressure reserves as well, because the central bank is the main source of foreign exchange.

Conditioned by previous crises to save in dollars, Argentines are obsessed with the greenback. The currency control regime ending on Monday forced people to go to the black market for dollars needed to protect them from the weak peso and fast-rising consumer prices.

The government, which consistently plays down the problem of inflation, is betting that the relaxation of controls will allow convergence of official and black-market peso rates. The official rate ended at 8 per dollar on Friday after falling 11 percent on Thursday, its biggest one-day slump in 12 years.

"An exchange rate of 8 pesos is an adequate level," Economy Minister Axel Kicillof said in a newspaper interview published on Sunday. "This is a reasonable level of convergence for the Argentine economy."

The black-market peso fell 7.25 percent on Thursday to close at 13.1 per dollar. On Friday, it rose 11.97 percent to end at 11.7 per greenback. Consumer prices rose about 25 percent in 2013, according to private analyst estimates. Official data, which many economists dispute, clocks inflation at less than half that rate.

A new government consumer price index, ordered by the International Monetary Fund, is expected to be unveiled next month. A price freeze imposed this month on staple foods has kept a lid on basic supermarket items. No one knows how long those prices can hold while labor unions prepare wage demands based on one of the world's highest inflation rates.

While inflationary, President Cristina Fernandez's policies were seen by most voters as the key to economic recovery from the 2002 debacle. She easily won re-election in 2011, promising deeper market interventions and more stimulus spending unencumbered by inflation targeting.


The effect of peso volatility on other countries' markets should be limited by the fact that Argentina has been unable to issue international bonds since its 2002 sovereign default.

Argentina's grains sector has held back exports as farmers hoard crops rather than expose themselves to the swooning local currency. That has contributed to the scarcity of dollars that has debilitated the peso. The country is the world's top exporter of soymeal and soyoil, as well as its No. 3 soybean and corn supplier at a time of booming world food demand.

The 2002 default, followed by a decade of policies such as corn export curbs, high soybean export taxes and the 2012 nationalization of the country's top energy company, YPF, scared off investment needed to expand the grains sector and exploit Argentina's huge shale oil and gas reserves.

If Argentina reports 30 percent inflation this year, as private analysts expect, it would mark the fastest rate since the 2002 crisis, when inflation reached 41 percent. Consumer prices are a big worry on the street, but the issue has not sparked mass protests lately. Tensions could rise over the weeks ahead as labor demands pay increases in line with private economists' 2014 inflation estimates.

Fernandez has mentioned neither consumer prices nor the peso's plight in recent speeches, leaving her cabinet to announce policy changes. The next presidential election is next year, with Fernandez unable to seek a third term. Possible candidates from the main parties offer policies that lean in a more pro-investment direction than Fernandez's, as the outgoing leader tucks into her last two years in power.

"If the government fails to prevent inflation from accelerating it will probably hurt the chances of presidential aspirants who are aligned with the administration," said Ignacio Labaqui, an analyst with Medley Global Advisors. "A deeper economic crisis could provide a window of opportunity for candidates who are more business friendly."

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Argentina set monthly limits on dollar purchases on Monday, keeping restraints on a currency market that it unexpectedly loosened last week in a move that battered the peso and jolted emerging markets globally.
Monday, 27 January 2014 10:24 AM
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