The economic troubles of Alberto Fernández’s presidency are quickly becoming synonymous with those of the country’s Central Bank. Emergency measures to halt the slide of the peso are leading to other mounting problems, requiring ever-growing draconian restrictions that only manage to plug holes for a few weeks.
Central Bank chief Miguel Pesce is at the heart of the storm, and his seat has lately become the hot one. A veteran who rose through the ranks of the monetary authority during the Kirchnerite years, Pesce has been under fire even from people within the ruling coalition after promoting new regulations that combined unpopularity with only small effects in terms of slowing down the pace of the crisis.
As Pesce increases restrictions, Argentines continue finding ways around them in their day-to-day efforts to survive the crisis and protect what’s left of their savings, and the latest quotes from government officials calling on people to trust the peso and to use peso-denominated instruments for savings are looking increasingly out of touch with the common man.
The clamp and black markets
Since the re-introduction of the so-called “clamp” on foreign currency exchange a year ago, Argentina has contained the rapid decline of the peso in the official market, but grey and black markets where US dollars and foreign imports can be more easily accessed have flourished, and the value of the peso has continued to plummet there. The Central Bank has been tightening restrictions further month after month, driving more people to look for the alternatives.
As a result, the Argentine currency now has multiple values, depending on where and how you trade it. Officially, 75.5 pesos can buy you one US dollar, as the USDARS ticker will tell you if you look up the data on Bloomberg or any other similar platform. But looking at that highly restricted market doesn’t even begin to explain the full picture.
The official rate: imports and foreign debts
That 75.5 peso-to-the-dollar exchange rate is only available for companies registered in Argentina’s Free Single Currency Market (MULC) — which in practice is neither single nor free anymore. Companies in the MULC now also depend on additional Central Bank authorizations for each transaction – especially when they are looking to buy dollars with pesos. These transactions mostly consist on imports and debt payments, and are in practice heavily subsidized by the Central Bank, which has to sell a few million off its reserves almost every day to make up for the lack of foreign currency sellers at that very cheap price.
The laws imposed with the re-introduction of the clamp have included obliging exporters to sell their dollars at this official price almost immediately after they make their sales abroad, but this has still proven insufficient to compensate for the massive demand for dollars on the other side of the supply-demand equation. In a freer market, this oversupply of pesos would push the exchange rate upwards until equilibrium was found, but Argentine governments are known for trying every trick available to halt these inevitable devaluations, knowing that they hit the purchasing power of their voters almost immediately.
As long as imports keep taking place through this official market, then inflation can be somewhat slowed down, as products from abroad continue to be cheap for consumers. But this comes at the heavy price of bankrupting the Central Bank, or imposing strict and often arbitrary restrictions on what can be imported and when, leading to lack of inputs for local production and the slow disappearance of some consumer products from the shelves. When exacerbated, this logic can lead to the dramatic scarcity problems seen in countries like Venezuela, although Argentina has seen nothing even close to that kind of scarcity drama at any point yet.
Reforms for individuals
To contain its losses and postpone the crisis, the Central Bank has banned individuals from accessing those cheap dollars, which are seen as less of a priority when compared to importers. Pesce limited currency purchases to USD 200 per month per person (and even then, not everyone qualifies to make those buys), while the government added two big taxes on top of the 75.5 pesos-per-dollar-exchange rate to make them less attractive.
First, the government imposed a 30 percent tax in December 2019 to all currency purchases, as well as foreign tourism spending and any other kind of spending abroad (Netflix, Amazon, Spotify and the like). Last week, it added another 35 percent pseudo-tax on top of it. This means that, in practice, the exchange rate for individuals is above 130 pesos-per-dollar.
This makes simple speculative moves such as buying dollars at the official rate of 75 pesos to sell them at black market prices, which also neared 130 last week, much less profitable, and protects Central Bank chief Miguel Pesce, mastermind of the latest reform, from a run against his reserves. But that might not last for long, as we will see in a minute.
Black and grey markets
Finally, there are the black and grey markets. These include the blue-chip swap market, in which investors use Argentine pesos to buy bonds or stocks that trade in Argentina and the US, and sell them abroad for US dollars. This mechanism is used to move money into a safer financial location and store it in a more stable currency, and the resulting rate between the pesos paid and the dollars obtained is known as the blue-chip swap rate. None of this process is illegal, though Kirchnerite governments often tried to make these operations more difficult.
Closely correlated to this is the black-market rate, used by individual investors and small companies to obtain hard currency in cash and protect their savings with no limits on how much to buy or hold.
Both these rates were trading around 130 pesos per dollar before the latest restrictions, but jumped to 145 this week. This means that, despite the government’s best efforts, it is once again profitable to buy at the official rate offered by the Central Bank (130 for individuals) and sell in the black market, further weakening its meager reserves and likely leading to more restrictions on imports.
Are big changes coming?
With even these short-term fixes lasting only weeks or months, the government seems to be running out of time economically. Quietly, some voices in the Kirchnerite camp are accepting that devaluating the official exchange rate will sooner or later become the inevitable move, but this is clearly not a consensus position yet.
Today, Minister Martín Guzmán said they are trying to narrow the gap between the different exchange rates without resorting to a devaluation of the cheapest, restricted, official rate. But that attempt seems unlikely to succeed in the long run.
So this might come down to a question of timing. Given the similarities of the current scheme with that of the late Kirchnerite decade, a good reference could be the late 2013-early 2014 crisis, in which the Central Bank was also running out of reserves and ended up accepting a jump from 6 to 8 pesos per dollar in January 2014, almost two full years before the next elections, giving the government time to recover popularity.
Politically, Fernández faces the problem that elections are only one year away. Does he devaluate now, or does he try to hold on for a year, knowing that it might all blow up in his face beforehand?
Risks for Pesce
As well as discussing the possibility of devaluation, the continuity of Pesce at the helm is also starting to be questioned.
Emmanuel Álvarez Agis, a private consultant who is close to the administration, came out against Pesce repeatedly this week, saying that “it’s clear than more than a lack of dollars, the problem has been the mistaken decisions of the monetary authority.” As for the possibility of devaluation, Álvarez Agis argued that Pesce is clearly doing everything within his power to try to avoid it, but “if the only answer is to apply more restrictions to the demand for dollars, then a jump in the exchange rate will just be a matter of time.”
The first rumors of potential replacements of Pesce have also been doing the rounds, although the government has played them down both in public and in private so far, and the first significant market bounce for Argentine assets today, after weeks of selloff, might give him a breath of fresh air.
The risks of firing a Central Bank chief in this context are not small. In a similarly chaotic context, the end of Federico Sturzenegger’s period as the head of the Central Bank during Macri’s administration only increased volatility and uncertainty. Just like Macri in 2018, Fernández’s government doesn’t seem to have a plan B ready in case things continue to go south.