Argentine presidential politics are in full swing. The unexpected ballotage runoff that will determine whether our next President is Cambiemos’ Mauricio Macri or Victory Front’s (FpV) Daniel Scioli is less than two weeks away, and both candidates are dutifully filling their time making broad, vague, crowd-pleasing promises to attract voters. Both candidates have moved to the center, making it difficult to single out differences in their economic plans for the country. With one notable difference: what to do with the so-called cepo, or restricted access to US dollars. Macri has vowed to “lift the cepo” and have one exchange rate immediately if he takes office in December. That may be neither feasible nor responsible.
The cepo dollar restrictions and the blue dollar are not intentional policy decisions, they are unintended consequences of a series of capital controls on different sectors of the economy. Over the past five years, President Cristina Fernández de Kirchner has drastically shrunk the foreign exchange market and introduced interrelated and impossible to quantify dislocations. In order to “lift the cepo,” Macri must address and remove each individual policy.
On a basic level, foreign currency is required by:
- Importers, to pay for goods from abroad
- The government, to make payments on debt
- Individuals traveling or studying abroad
- Foreign companies operating in Argentina, to send their earnings back home
- Argentine companies with operations in other countries, to make payments
- Argentines who want to save in US dollars
Under Cristina, the government has limited almost all of these actors’ access to foreign currency on many different occasions. Besides just limiting access to foreign currency, this administration has intervened in the foreign exchange market in other ways, including:
- Forcing the state pension fund (ANSES) to sell dollar assets in the local market
- Prohibiting insurance companies from holding assets in US dollars above a certain point
- Using the Central Bank (BCRA) to sell short-term notes to put off the effects of inflation
- Forcing banks to sell dollar assets in the local market
- Sanctioning or shutting down brokerage houses that trade US dollar bonds and stocks
- Forcing mutual funds to value US dollar assets in Argentine pesos at the official rate
- Limiting airlines’ and travel agencies’ ability to purchase dollars
- Selling dollars at 13 AR$/US$ to individual savers to prop up the local blue dollar market
These interventions don’t even touch the insanity that is the import/export market. In most cases, countries restrict imports to protect local industry from international competition. In Argentina, the government doesn’t have enough dollars to pay for the imported inputs needed by local industry to manufacture things like cars and air conditioners. On the export side, exporters have 90 days to repatriate the money from selling their goods abroad at the official rate. Those pesos are then stuck in Argentina unless the exporter buys bonds and transfers the money out at the blue dollar rate. Example here. Then there are extra taxes on soy exporters, quota licensing schemes for meat exporters and a myriad of other economic distortions that have piled up on each other since 2010 when the cepo restrictions began to be put in place and the parallel rate departed from the official rate.
Each of these specific restriction paths contains implicit and explicit taxes that end up in the federal government’s pocket.
Cristina’s government didn’t introduce this economic madness intentionally, deliberately or for fun. This administration spends the money at home — on unsustainable energy subsidies, expensive and popular social programs, pseudo-companies such as Aerolineas Argentinas that lose between US$1 and US$2 million daily, and the list goes on. Sure, there is a fair amount of corruption and graft, but stripping it out won’t balance Argentina’s budget.
So is Macri making a promise he can’t keep? It depends on how you interpret his smoothly crafted political phrasing. His economic advisor Alfonso Prat Gay was President of the Central Bank under Néstor Kirchner, and is quite a clever man. It is highly unlikely he would advise or endorse policies with obvious risks of abrupt economic crisis.
The Macri camp and a horde of economists and analysts keen on getting their headshots published in business newspapers have unified behind a message that a starting point for a free exchange rate on December 10 is 14 AR$/US$. Which is all very nice to say, but doesn’t change the fact that on 10 December, regardless of the fact that Macri is viewed by the world as business friendly and will over time address the distortions and problems plaguing the economy, the Central Bank will still have no cash. So if more people want to buy pesos than want to sell dollars, the country will run out of money. Again. Argentina doesn’t have foreign currency to defend an exchange rate, even at 14 AR$/US$.
Cristina’s administration has drastically shrunk the size of the market, as well as put in place restrictive policies. Initially, Macri is likely to keep in place the restrictions that have kept the market small so he can make good on his promise to have one exchange rate. This is a positive first step towards normalizing relations with the rest of the world, but the hard part will come when Argentina realizes negotiating a settlement with the holdout “vulture” funds will not be a panacea that brings in enough dollars over night to pay for expensive energy subsidies and social spending programs.
As for Scioli’s promise that in January the exchange rate will be below 10 AR$/US$? Reality check, man. I expected something that at least warranted consideration, not just regurgitating five years of blue dollar and made-up multiple exchange rate analysis.