I like to start my day with a run, a cup of coffee, a cigarette, and a cheeky read of the headlines, all at the same time. It’s messy, a bit dangerous, and confuses observers so it’s right up my alley.
This article on Bloomberg about Venezuela’s black currency market caught my eye. In the next few weeks, Venezuela will be selling US $900 million via an auction mechanism at above the official rate, but legally, in an effort to bring down the black rate.
You know how in Argentina the
black blue rate is about 10 ARS/USD, or nearly double the official 5.83 ARS/USD official rate? Well in Venezuela the black rate is 45 bolivars/USD, over seven times as high as the official rate of 6.3 bolivars/USD. Yikes. To throw even more perspective at you, Venezuela imports 70% of its goods from abroad, so even the basics like toilet paper and chickens are a Herculean feat to obtain. Venezuelan President Nicolas Maduro stated that the sale will “complement any need the economy may have”, while analysts’ and traders’ comments suggest the effort is like sprinkling holy water on a forest fire.
I bring up Venezuela this morning because I am frequently asked what I think is going to happen in Argentina. I’m not a gypsy and I can’t tell the future, and I disdain those who talk about Argentina’s economy like they know exactly what is going to happen, because the reality is that they don’t and I don’t, and even Mrs. Kirchner probably hasn’t a clue. Venezuela provides a very sobering cautionary tale, because their economic policies look like Argentina’s on steroids, and let’s face it, none of us want to live in Caracas.
Back in 2010 when the blue rate started to diverge significantly from the official rate, and weekly new piecemeal currency controls became the norm, I started salivating because I saw this as evidence of an eminent currency crisis brewing on the horizon. But three years later, here we all still are finding loopholes to move money in and out of the country and bemoaning the rising prices of taxis, rent, and groceries.
Economic crises, while damaging, are a part of growth because they stamp out unsustainable policies and force countries to make corrections. Take my country, the United States. We were giving home loans to people we knew couldn’t pay for them, lying and rating those loans AAA or top quality, and then chopping them into little pieces and sticking them into investment bundles of equally crappy quality, giving the whole bundle the AAA rating. To anyone with a brain, that’s a stupid idea because when the mortgages don’t get paid the effect spills over, and everyone is left holding worthless and confusing bundles of crap. Enter the financial crisis of 2008. Don’t do it again, America.
Argentina for the past 3 years has been like living in a cardboard box sitting under a leaky faucet. If you took a brand new cardboard box and quickly stomped on it, the damage could be repaired with a bit of packing tape and a loving hand. That’s like a quick crisis – the economy grows too fast, a zillion uninhabited buildings go up seemingly overnight, money rushes in, and then something happens to spook investors and that money scampers back out faster than scared squirrels in a dog park. The dust settles, the squirrels creep back in, and life goes on. Now take the same box and drip water on it for a few years. You’re left with a pile of worthless soggy mush. The squirrels have moved on and you need to build an entirely new box. That soggy mush is Venezuela. Argentina is right now a wet box that needs to sit in the sun for a while.
People ask me if Argentina can take the Venezuela path, and the answer is no for one reason alone – it can’t afford to. Venezuela is the largest oil exporter in Latin America and the 13th largest in the world, giving it the resources to act a fool in the economic world.
Argentina plays a sensitive balancing game between the following crucial components that will lead to the next crisis:
- Subsidies for electricity and transportation
- Import/Export restrictions
- Foreign exchange controls
- Payments on external debt
These four components can be further reduced to a bottom line that is out of Argentina’s control:
- DOLLAR RESERVES
Argentina will have a crisis when it runs out of dollars. Unlike Venezuela, Argentina has to import oil and it has to subsidize domestic consumption of this expensive import to keep the voters happy. It pays for this oil with dollars accumulated by taxing exports and repatriating the dollars earned at the official rate. It tries to compensate by preventing additional imports and printing pesos (tada!, inflation). It prevents money from leaving the country via controls. But at the end of the day, the external debt has to be paid in the same dollars that are used to buy oil abroad.
So yes, a crisis is coming. What will it look like? That’s a conjecture for another morning, but the path to Venezuela is out of the question. Sure there’s oil in Argentina, but it’s unconventional, meaning expensive and difficult to get out of the ground, and while international oil companies throw little bits and pieces of money at the Vaca Muerta shale reserves, they’re not going to fully finance an expensive project that would at the end of the day enable an incompetent government to keep a host of unsustainable policies on life support.
And so my friends, while this may not be Paris, rest a bit easy because it won’t become Caracas either.