By: Brad Haynes
January 31 2014
In the midst of Argentina’s biggest currency devaluation in a decade, with the peso’s plunge rattling financial markets worldwide, President Cristina Fernandez’s first public address in weeks was silent on the matter.
She didn’t say a word about the currency, but instead took to national television last week to announce the latest government measure – a new form of high school scholarship.
While the president has avoided mention of currency policy, the increasingly unpredictable messages from her ministers have amplified the risks weighing on the peso.
An announcement last week suggesting long-awaited relief from currency controls for ordinary Argentines in practice meant a trickle of U.S. dollars for an affluent minority.
Officials also promised to cut the tax rate on spending dollars overseas, but revoked the measure just two days later.
Critics say the government’s erratic decision-making is the biggest risk looming over the volatile peso, as the policies that triggered the currency crunch have only become more contradictory as the crisis unfolds.
The stakes aren’t what they were in 2002, when a record sovereign default shook the global economy, as Argentina has since been ostracized from global credit markets. Still, the sense of a government without its bearings is familiar to some.
“Every day it’s a different argument,” said former central bank president Aldo Pignanelli in a radio interview, pointing the finger at brash 42-year-old Economy Minister Axel Kicillof.
“In 2002 we got things right and wrong, but we faced the storm. I see what this kid is doing and it gets me furious, because we’re losing precious time to take coherent measures.”
Even the dynamics of the peso’s 15 percent drop last week are shrouded in uncertainty. At the start of the historic slide, on Wednesday, there was no government intervention, but by Thursday the central bank was intervening heavily to hold the line, as it has this week. Officials blamed a “speculative attack” in the tightly controlled interbank market.
With the right mix of policies, the devaluation could have helped boost exports and brought relief for Argentina’s dwindling foreign reserves. But the chaotic approach has meant the central bank is burning more quickly through reserves and there is even more pressure on perilously high inflation.
As veterans of previous crises, Argentines have assumed a familiar defensive crouch, hoarding any dollars they have and spending pesos like they are going out of style.
“Right now all you can do is buy. Today. Not tomorrow,” said Walter Yofre, 41, an accountant on a bustling retail boulevard in Buenos Aires. “I just got a memory chip for 268 pesos. This morning the store was charging 245!”
Trade on a major grains exchange has dried up as farmers stockpile their soybeans rather than taking pesos. Goods are backing up at the border as officials try to slow the impact of more expensive imports.
And ordinary supply chains are frozen with uncertainty in a country where the dollar is a reference for everything from real estate to raw materials.
“You pick up the phone and 90 percent of your suppliers will tell you they’re out of stock,” said Gaston Luccisano, who runs a kitchen goods store in the middle-class neighborhood of Caballito. “The guy could be staring at a stack of plates but he won’t sell until he knows what it will cost to restock.”
Many economists say officials are obsessing over symptoms while aggravating the illness with an improvised approach.
Economy Minister Kicillof, a former professor of Marxist, spent this week chasing down what he calls speculative price gouging by major corporations.
In daily meetings with business leaders, he and top officials have warned cement makers to avoid “unpatriotic” pricing and forced retailers to roll back new price tags.
Devaluations can help exporters and eventually slow the drain on Argentina’s foreign reserves, which fell over 30 percent in the past year to below $29 billion. But shock and uncertainty over the measure has also fueled the rush for dollars.
Reserves have fallen more than $2.3 billion so far this month as the central bank fights to defend the new exchange rate – more than ten times what was lost in all of December.
“There is no doubt: this crisis has been entirely self-inflicted by confused policies,” said Eric Ritondale, senior economist for Econviews in Buenos Aires.
Making matters worse, the spike in import costs and a stampede of shoppers trying to lock in prices for durable goods is now feeding Argentina’s inflationary demons.
Consumer prices have risen about 4 percent in four weeks, according to economic consultancy Elypsis, who put the annual inflation rate near 30 percent. Private economists reported inflation of about 25 percent last year – more than double the price increases recognized in the government’s official index.
To interrupt the inflationary feedback loop, the government would need a coordinated program to cut back deficit spending, stop the money presses at the central bank and keep wage hikes under control, economists say.
The central bank has taken some tentative first steps since the devaluation, hiking a key interest rate this week and signaling tighter monetary policy.
The best case scenario, according to Ritondale of Econviews, would be interest rate hikes triggering a sharp economic slowdown. The economy could shrink 3 or 4 percent this year, he said, cooling inflation and restoring enough of a trade surplus to replenish foreign reserves.
That would be an orderly adjustment compared to the crisis set off in 2001, when a string of presidents resigned amid riots and looting as the unemployment rate climbed to more than 20 percent.
There is little or no risk a similar financial collapse, as Argentina’s exclusion from international credit markets since then has left the country with few foreign debts.
Most Argentines are also numbed by years of an overheating economy, discussing the latest prices like the weather. “So, have you bought anything?” is a common conversation starter.
But the potential for social conflict is real.
The test may come in March, when labor talks will have powerful unions out in force, threatening strikes and protests to keep wages rising with consumer prices. Labor disruptions are as regular as the seasons in Argentina, but broader economic frustration this year could make things volatile.
The pressure would be difficult for an avid inflation hawk – and the president is anything but. At a political rally after a stinging primary defeat in last year’s midterm elections, Fernandez showed her colors.
“Do you know what it means when they say we should govern according to inflation targets?” she shouted to flag-waving supporters. “I will translate it for you. It means they want to cap your wages.”
BACK AND FORTH
If the government’s fight against inflation has been inconsistent, currency measures have been downright contradictory.
Two years ago, officials attacked the “dollarization” of the economy, discouraging the listing of apartments and cars in anything but pesos. Last year they reversed course, printing central bank paper indexed to the dollar and facilitating dollar-denominated commerce despite the scarcity of greenbacks.
In May, Fernandez dismissed critics suggesting the possibility of a devaluation: “They are going to have to wait for another government.”
Yet last week her government oversaw the peso’s biggest daily drop since 2002.
The recent loosening of currency controls was equally unexpected.
Last week, officials announced access to dollars for private savings for the first time in two years, creating even more demand for scarce foreign reserves. Until then Argentines could only turn to far more expensive dollars on the black market.
But by Monday it became clear the new currency market would be tightly controlled, with just one in four Argentines meeting salary requirements and only a fifth of their wages eligible.
Officials also promised last Friday that the tax rate on Argentines’ overseas credit cards bills would fall in line with the new market for dollar savings.
That is, until Kicillof scrapped the idea two days later.
While some have read the waffling as signs of moderation, others see a government without a plan.
“They have been reacting more than anticipating,” said Daniel Marx, Argentina’s finance secretary from 1999 to 2001 and the head of consultancy Quantum Finanzas. “Their strategies haven’t worked as planned, so they’ve had to correct course. The question is whether they are clear on their goal.”
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