We’re closing in on the last six months of Cristina Fernandez de Kirchner’s term as Argentina’s president, and it’s commonly accepted that the likelihood of an economic crisis on her watch is negligible. Yet all eyes remain on the country’s scant US dollar reserves and the controls the government is willing to put in place to to keep them from running out.
Economy Minister Axel Kicillof made headlines when he stated that the cepo, or dollar controls, don’t exist – that the country instead uses the finite resource of dollars to import goods, to make transfers to utilities, to pay down external debt, and to sell dollars to the people who want them. Yet the cepo cambiaro, as blocking access to dollars is known, definitely still exists especially at the import and corporate transfer level.
The gap between the unofficial “blue” dollar and the official dollar has gone down and stayed there for the past month, leading many to conclude that the government has increased the value of the Argentine peso relative to the US dollar. Yet when you look at the ratio of Argentina’s money supply to the dollar reserves (basically just divide how many pesos are floating around out there by how many US dollars there are in the Central Bank), you come up with the rate of ARS 14.74/USD, more than 2 pesos higher than the current blue dollar rate. So even without liberalizing imports or permitting Argentines to buy dollars freely at the official rate, the ratio of pesos to dollars should be higher.
So what gives?
The best part of economics is that even though economists try to simplify concepts using models (supply and demand, remember?), the methods through which governments influence actors and rates are imperfect and interconnected. More than one part moves at the same time, making it exceptionally difficult to isolate what influences what, and whether events are correlated or directly related via cause and effect.
I wrote a few weeks ago about how the government is able to keep the blue rate down by first shrinking the forex market (no imports, putting bond trading houses out of business, no repatriation of revenue, etc) and then intervening to lower the blue dollar by injecting dollars. What I didn’t explain in detail is the form this intervention takes.
Since January 2014, the Argentine government has run a program that allows some workers to buy dollars for “savings”. These are the rules:
- You must be an employee fully in white, all income declared, and have all tax information up to date with the tax agency (AFIP) and the Department of Labor
- You can go online to the AFIP website, where you fill out a form and receive authorization to convert an amount equal to 20 percent of your monthly declared earnings (no more) into US dollars
- Once you receive the authorization you complete the transaction by presenting this authorization online to a bank in which you hold a US dollar bank account.
- If you want to receive physical dollars on the spot you get the official rate minus a 20 percent tax. Otherwise you can keep the dollars in the bank for one year and not be taxed. AFIP reports that 92 percent of these “savings” buyers opt for physical bills.
So what happens is that individuals receive dollars for roughly ARS 10.5/USD, and then can quickly turn and flip these USD on the blue dollar market for ARS 12.6/USD and pocket the difference. Ladies and gentlemen, we have arbitrage!
As you can see from the graph below courtesy of @lfisan, the amount of dollars sold per month has increased precipitously since July and August of 2014, when the blue dollar kept climbing and even crossed the 15 ARS/USD mark.
Dólar Ahorro: acumulado abril US$ 354M. pic.twitter.com/zYannnFMGr
— Leandro Fisanotti (@lfisan) April 17, 2015
The graph below shows the difference between the official and “blue” dollar over an inclusive time frame. As you can see, even though the gap between the two rates has gone down, thus decreasing the profitability of this cheeky little “savings” dollar arbitrage, the government has sold an increasing number of “savings” dollars.
So – why are there more “savings” dollars on the streets even though the relative arbitrage opportunity has gone down?
This question actually comes down to whether it is supply or demand driven.
Maybe there is more SUPPLY: If the increased dollars sold to savers is due to increased approval rates and authorized amounts by the Government, then these savings dollars are functioning as a monetary policy tool to inject physical US dollars into the unofficial market. Combined with increased controls in other areas (restricting access to dollars to importers and companies looking to send funds abroad and clamping down on traders who buy and sell dollar-denominated stocks and bonds), this supply increase is a physical dollar injection that has the effect of bringing down the unofficial rate.
The Government claims it is DEMAND and attributes the rise in “savings” dollar sales to increased purchasing power among those eligible to buy them. The story goes something like this – because people have more disposable income every month due to improving economic conditions and low inflation, they are buying more dollars to hold as savings. Now – I think this is incorrect for two very important reasons:
- The Method to buy “savings dollars”: The process to acquire these physical dollars can be initiated and approved by AFIP before physical cash is ever presented or a bank balance is proven. So if a qualified individual applies and receives the authorization, he can (and does) easily borrow some pesos from a friend and then split the arbitrage benefits from flipping the dollars on the blue market.
- 92 percent of these savers take the cash: By taking physical bills instead of keeping dollars in the bank for one year, these individuals take an immediate 20 percent hit on the value of their “savings”. If you look at these savings like an investment in the future, that’s like choosing a zero interest bond vs a 20 percent interest bond. If you actually wanted to save US $100 dollars for a year, you’d prefer that US $120 at the end of the period.
The “savings” dollar sales are making headlines because people see them as a populist means to appease individuals by giving them cheap dollars and also control the blue dollar rate. This populist moves comes at the expense of other, more essential areas of the economy.
Banks have been instructed by the Central Bank to instigate a “suggested” minimum approval period of 90 days to release dollars to importers, even with bank letters of credit. In the past, transactions with letters of credit have only made up 10 percent of the total import value, but in recent months 20 to 25 percent of transactions are backed by a bank letter of credit, as importers have learned that the bank-backed transaction is more likely to be approved. Since February, the Central Bank has required banks to present all of the details of bank letters of credit two months before submission, and now an extra 90 day waiting period has been “informally” tacked on the end. Five months is a long time to wait to import.
Furthermore, The Central Bank currently has an unpaid debt equal to over US $4.6 billion dollars to importers. Additionally, the Central Bank only authorizes US $0.30 to the auto industry for every dollar it grants to “savers” who really just spend the cash in the unofficial market. An estimated 85 percent of imports for the auto industry are inputs necessary for manufacturing. So in this case the Government is essentially crucifying an industry that employs workers and benefits the economy to keep the blue dollar down. The effect is two-fold: by not allowing the car manufactures to import they shrink the forex market and by injecting the money physically into an operation that will quickly result in more US dollars on the streets, they push the rate down.
Kicillof was right in saying that a government uses foreign reserves to import goods, service debt, pay utilities, and sell to individuals who demand foreign currency. The problem is that if you made a pie chart out of these four areas, the slice for individual foreign currency transactions should be so tiny it is negligible – not 3 times the size of the auto industry and certainly not enough to move a large country’s exchange rate.