Expectations rarely coincide with reality. In fact, letdowns and disappointment are unfortunately more common than the alternative. As with all things, it is prudent to apply a healthy dose of logic when assessing whether or not a particular promise is worth getting your hopes up for.
Last week, Central Bank President Alejandro Vanoli promised that 2015 would bring a gradual normalization of the foreign exchange market. Yes ladies and gentlemen, Mister Vanoli has spoken on behalf of the Cristina de Fernandez Kirchner administration stating that with no additional restrictions, they are going to close the cepo cambiario, or the difference between the official and unofficial/blue exchange rates.
The biggest problem with that statement is that the cepo cambiario is not an official policy or direct consequence of one government initiative. The very existence of the parallel unofficial rate is the complex and indirect consequence of a web of policy decisions put in place primarily to bolster public support of the administration and stave off some form of crisis.
Let’s take a look at currencies in general. At the most basic level, currencies are like any other good, except you can use them to buy almost everything else, thus freeing us from the barter system. And like other goods, a currency has a price and an exchange rate is that currency’s price, quoted in another currency. So how come the official rate, which even comes up on services like google, is different from the unofficial, parallel, or blue dollar?
Imagine I set up a shop on the corner of your street and put a sign out front that said “1 gram of gold for US $1”. You’d likely collect your dollars and eagerly run into my shop to buy gold at a 97 percent discount from the market price. You would be quite disappointed when you walked in and I informed you that what I meant by the sign was that I’d buy gold from you for US $1 dollar a gram, but I actually wouldn’t sell you any gold at all. I’d sell you a very small amount of gold after you filled out reams of complicated administrative paperwork, and I’d apply a tax that would bring the price close to the market rate of about US $38.5 per gram. In this clumsy allegory, my gold shop is Argentina’s central bank, Gold is USD, USD are Argentine pesos, and the cepo cambiario is the official market price of gold minus my fake made up price of US $1 per gram. The moral is that you can say a price is anything that you want, but if no one is buying or selling at that price the number is fairly meaningless.
Now in the case of Argentina and the peso (ARS), it is a matter of what the Central Bank realistically has the power to do. In most states, the Central Bank acts essentially as a market maker, ready to buy and sell as much currency as is demanded at the quoted rate. The Central Bank can use monetary policy tools such as changing the interest rate, setting bank reserve ratios, and buying and selling local currency denominated bonds to push this rate up or down, but the more the Central Bank uses these tools to affect the exchange rate, the less these tools are available to help achieve local policy objectives. If the government were a giant octopus, the more tentacles it uses to push on the exchange rate, the fewer tentacles available to pluck at unemployment, etc.
Since Vanoli has taken up the Central Bank presidency, the unofficial or parallel rate has gone down and the cepo cambiario has indeed narrowed. This is a result of the foreign exchange swap line with China, which bumped up the reserves, and the recently-auctioned 4G telecom spectrum, which also brought foreign currency into the country.
These two moves alone will not correct the imbalance that underlies the parallel exchange rates. The same populist overspending programs that keep people happy fuel inflation and necessitate capital controls that prevent money from leaving the country and scare investment away. Correcting the parallel rates requires increasing the number of dollars consistently coming into the country – i.e. issuing dollar-denominated debt or increasing exports. In order to do the former, the country must find a solution to the vulture/buitres dilemma. To do the latter would require a slow and politically unpopular process to allow imports in and simplifying and reducing taxes on exports.
“Slow and politically unpopular” are not typically the kinds of projects upon which leaders embark in an election year.
So while I am sure that Mister Vanoli would love to go down in history as the central banker who solved Argentina’s famous currency woes, that is as unlikely as my US $1 gold shop.
But as Martin Luther King Jr. once said, “we must accept finite disappointment, but never lose infinite hope”. We’ll have a new president in less than one year who might have the grit for “slow and politically unpopular”.