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Reserves heading below US$30 billion

Economy Minister Axel Kicillof will try to obtain a finance swap from China
By Fermín Koop
Herald Staff

The federal government’s decision to boost the devaluation to make the peso more competitive has led to the drop of the Central Bank international reserves continuing throughout this week, decreasing US$417 million from US$30.900 billion on Monday to US$30.483 on Friday. This leaves the reserves near to breaking the psychological barrier of US$30 billion, something that could happen next week if the dropping trend continues.

The government has already implemented two strategies to solve the drop but economists consider them only palliatives. An increment of the tax for foreign tourism was decided, going from 20 to 35 percent, while the bill to charge more taxes for high-end goods awaits approval in the Senate after being passed in the Lower House.

“Increasing taxes on tourism is only a palliative measure that doesn’t solve the real reasons of the drop, as well as the bill for high-end goods. We are facing a much more structural problem,” Rodrigo Álvarez, head of Analytica agency, told the Herald. “The government is now trying to put a ban on foreign expenses, while the important question of why people choose to buy dollars and not pesos remains unanswered.”

Tourism is one of the major causes of the drop in the reserves. The existence of a black market entices tourists to change their dollars at higher rates, with most of that money not entering Argentina’s economy. At the same time, expenses of Argentines abroad continue to grow, leading to more money leaving the reserves. Only one in three dollars from foreign tourists is currently exchanged in the legal market.

Higher taxes on foreign tourism and an official dollar now with taxes included hopes to solve the reserves drainage, which have fallen almost 30 percent this year. Economist estimate tourism depletes the Central Bank’s reserves by between US$600 million and US$800 million a month.

“The government decided to prioritize the use of international reserves in other areas more important to the economy. Tourism and high-end goods are not on that list,” Andrés Asiaín, economist and head of the Scalabrini Ortiz institute, told the Herald. “Increasing taxes on both might slow the drop but it won’t stop it. The main problems are energy imports, together with electronic goods and auto parts.”

While the drop due to tourism might be solved after the new measures, devaluation remains now as one of the major concerns. The government boosted it after the Cabinet reshuffle and points to make the peso more competitive but it has the side- effects of continuing the drop on the reserves and a higher inflation.

The official dollar rose 10 cents this week, breaking a new record with the highest weekly growth over the last five years. The last time this kind of devaluation was registered was in the week of October 31, 2008, when the currency increased 11 cents and closed at 3.40 pesos.

“The government will carry on with its devaluation and that will lead to the drop of the reserves continuing. Now officers are looking for international funding in order to finance the drop,” Marina Dal Poggetto, partner at Bein, told the Herald. “The major question is if the government can carry on devaluation without claims for higher incomes starting due to the inflation.”

New bond for grain exporters

The Economy Ministry is now working together with the Central Bank and the Agriculture Ministry in order to offer grain exporters a dollar-linked bond so they can sell their remaining crops, leading to fresh dollars widening the international reserves of the Central Bank. The initiative might help to gain up to US$5 billion that represent 10 million tons of soy that have not been sold yet.

The government insists that soy farmers are hoarding more of the oilseed than usual, with Cabinet Chief Jorge Capitanich discouraging producers from engaging in what he defined as speculative behaviour, pinpointing such hoarding as one of the top causes behind the recent depletion of Central Bank reserves.

Calculating the proportion of this year’s harvest that remains unsold is not straightforward, however, with many farmers arguing they are simply waiting for the best moment to sell their produce, as any other merchants would. The context of persistent double-digit inflation that some estimate at more than 20 percent tied with a quickening devaluation, makes keeping a portion of harvests a viable savings mechanism, some in the sector argue

“It’s understandable that a farmer chooses not to sell his crops now when he can wait a couple of weeks and do it at a higher price. The government boosted the devaluation without anybody knowing when it will stop,” Álvarez said. “Grain exporters receive pesos after selling their crops and the only option they have is making a deposit in a bank at a low interest rate.”

Establishing agreements with international agencies is the other strategy implemented by the federal government to obtain dollars. Economy Minister Axel Kicillof will meet today in China with Federal Planning Minister Julio De Vido to negotiate a financial swap with the Chinese People`s Bank, while rumours indicate the government is working toward an agreement with debt holders at the Paris Club.

At the same time, De Vido is now carrying on a tour of several countries to find investors for key energy projects that need to be done in order to reduce the energy imports and that would bring dollars into the country. The same is to happen with Vaca Muerta shale reservoir in Neuquén, where numerous investors are awaited after the government signed an agreement with Spanish oil company Repsol over YPF’s state-run energy company expropriation.

@ferminkoop

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