It is truly the end of an era. Argentina’s currency controls, known collectively as the cepo and that led to the myriad of blue dollar unofficial rates, are one of the hallmarks of former President Cristina Fernández de Kirchner’s economic mismanagement.
Tonight President Mauricio Macri will begin the unwieldy and economically risky process of unwinding these controls and unifying the exchange rates, effectively ending the ubiquitous blue dollar. What will we all do for fun around here?
In all seriousness, this is a big day for Argentina. There will be painful short-term consequences for many sectors of the economy that have been effectively subsidized for years by an overvalued peso. Furthermore, I choose the wording “unwinding these controls” rather than “ending the cepo” intentionally. The cepo is a mishmash of intertwining and interrelated policies acting on various actors, and the blue dollar and parallel rates that exceed the official rate by a margin of 40-60 percent are unintended consequences of these policies. Argentina does not have enough cash to remove every capital control immediately, so officials must pick and choose.
What is the Cepo?
The cepo is made up of currency controls and import/export rules designed to protect Argentina’s foreign currency reserves in the Central Bank (BCRA). These policies originate from the tax collection agency (AFIP) as well as the Central Bank (BCRA) and directly and indirectly impact individuals, companies and financial institutions including banks.
To purchase dollars, individuals must file an online form with the AFIP seven days or fewer before traveling abroad requesting authorization to buy dollars. They can also buy heavily-taxed “savings dollars” with AFIP authorization and pay a whopping 35 percent on credit card purchases made overseas. The BCRA only allows individual travelers to receive the currency of the destination country rather than US dollars for travel to the Eurozone and other Latin American countries, and debit card purchases overseas are limited to those with a foreign currency account.
Retired persons with pensions in foreign currency receive payments in Argentine pesos at the official rate. Customs seizes and inspects all packages, meaning no Amazon.com for Argentines 🙁
Exporters have 90 days to repatriate all foreign currency earned from the sale of goods abroad, and the BCRA converts proceeds to Argentine pesos at the official rate. Agriculture exporters of agricultural exporters were charged duties up to 35 percent for the case of soy until yesterday, when these duties were removed for all agricultural products except soy, which was reduced to 30 percent. Companies must receive BCRA approval in the form of a Declaración Jurada Anticipada de Importación (DJAI) to pay for imports, as well as to pay service providers overseas (DJAS where the S is for services), distribute profits, or send money out of the country. Shockingly, this approval was frequently only received with a little extra help paid as a cheeky bribe to the tune of 15 percent of the value of the approval. Nice, right?
BANKS AND FINANCIAL INSTITUTIONS
Bank access to foreign currency was systematically and increasingly tightened over the past five years. Banks must report dollar purchases to the tax agency 10 days in advance and seek pre approval for granting mortgage credits, all of which must be in Argentine pesos. Permitted bank reserves have fallen over and over to force liquidation of dollars in the local market. No foreign exchange houses can operate in airports or other ports. Banks, financial institutions, and insurance companies are restricted from buying and holding assets in foreign currency. The securities regulator (CNV) requires that investment funds value foreign assets at the official rate rather than prevailing market rates.
Despite Finance Minister Alejandro Prat Gay’s completely vague press conference today announcing the “end of the cepo”, it’s just not that easy. And while he deftly avoided saying the devaluation word and instead opted to say the rate at which internationally traded bonds imply, this means an official rate of around 14.5 ARS/USD and is a devaluation to anyone who previously was able to access dollars for less pesos.
Argentina does not have enough dollars to just start selling them to any man, woman, child, company, or bank who wants dollars, so they can’t simply repeal or amend the policies laid out in the previous section overnight. And while the market has hovered around a 15 ARS/USD equilibrium for quite some time now, unwinding controls will vastly increase the size of the current peso-dollar market.
To simplify the task, it helps to go back to the macroeconomic concept of the balance of payments. Basically, a government’s balance of payments equals the sum of the capital account plus the current account, and must equal zero; or, the capital account balance is equal and opposite the current account balance. The current account contains all exports minus imports, payment for services abroad like tourism, international dividend payments. The capital account contains foreign direct investment, stock and bond purchases, government debt, and central bank reserves.
Why the quick refresher in Macroeconomics 101, aka probably the most poorly taught snooze-fest of all time? It’s important to understand that the balance of payments has to equal zero, or Capital Account = – (Current Account). The cepo is made up of capital controls that affect different elements on both sides of the equation. So if they move one side without the other, the consequences will be felt somewhere and central bank reserves will run out. The BCRA needs a minimum stock of reserves to intervene steadily and maintain continuity while the market reaches equilibrium. So we’re back to Argentine economic basics: No money, big problems.
This week, the government removed and relaxed export taxes on agriculture. Estimates suggest this will bring in an immediate US $4 billion immediately, and about US $8 billion over the course of the next year. Argentines will spend less abroad on tourism whereas foreign tourists will stop buying blue dollars and move from the informal back into the formal market, which will bring in over US $3 billion next year. So that’s a bit of cash, but even without the need to settle with the holdout “vulture” funds, Argentina needs US $7.8 billion next year to service its foreign debt. Furthermore, while Macri has been dutifully chipping away at reforming money vacuums like Aerolíneas Argentinas and Futbol Para Todos and sticking to the energy subsidy cuts passed under his predecessor Cristina Fernandez de Kirchner, he has not proposed sweeping cuts to public spending.
And thusly, Argentina needs to attract some money to the capital account. The IMF and a coalition of international banks may step up to the plate in the short term and provide a cash cushion. But that will neither last nor provide the long term base of reserves the Central Bank needs to manage a stable floating freely-traded currency. In the immediate medium term, the government needs to create an environment that attracts foreign direct investment inflows and allows the government to raise sovereign debt to invest in infrastructure at reasonable rates.
What does that mean for me?
It depends who you are. If you earn pesos, use an Argentine credit card and have some kind of financing from an Argentine bank, you’re not going to be the happiest of clams. To attract money, Argentine banks are going to have higher interest rates. That means higher interest payments on your credit card and less financing in the local market, at least at first. This could be offset by banks’ ability to access dollars pretty quickly, but at first it will sting.
Prices of basic consumer goods like grains will centimeter up a little bit but stabilize quickly. Energy subsidies are disappearing, which has nothing to do with the cepo but will surely be lumped in with the evils of President Macri.
If you’ve been using an Argentine credit card to access dollars for less than 15 ARS/USD, buying “savings dollars” or “tourism dollars” with AFIP authorization, your dollars just got more expensive. Prat Gay explicitly defined that AFIP authorization will no longer be required to buy dollars, period. If you’re a tourism company, rejoice. You can buy international plane tickets and more Argentines will be forced to vacation in country this year.
If you assemble terrible Chinese or Korean electronics or domestic appliances somewhere in Argentina and then sell them to helpless consumers for ludicrous prices, welcome to 2015. A refrigerator that looks like it should belong to a sad bachelor in 1992 should not cost three months of rent. The same goes to the garment manufacturing industry, who will no longer be able to run sweatshops full of Paraguayan and Bolivian immigrants that churn out heinous polyester atrocities in “one-size-fits-nobody” and sell them for the cost of about three weeks worth of groceries.
If you export basically anything, or import either final goods or industrial components, you’re probably drinking Argentine sparkling wine and weeping tears of joy right about now. You will be the first to access foreign currency and the first to feel the benefits of unification.
If you are a foreign company holding huge sums of Argentine pesos, you should soon be able to declare dividends and transfer some of these funds overseas.
If you’re unemployed, sign up for foreign language classes and send your resume to multinational firms operating in the country.
And if you’re confused or nervous, you’re not alone. Prat Gay explicitly is doing away with the policies that required AFIP authorization, and has prioritized the import/export market. As for banks, financial institutions, and other companies, it is still unclear.
The next six months will be wobbly. The blue dollar won’t disappear overnight – unification is a process, and the first dice have been cast. Now let’s see how the chips fall.