November 26, 2014
For a fistful of dollars
The clamp is eased, but what about the anxiety?
Relax, the currency exchange clamp has been eased by President Cristina Fernández de Kirchner’s administration. But relax at your own risk. And can you really ever relax in politically-volatile Argentina? The peso’s drastic devaluation (18 percent in a week) is now raising concerned eyebrows the world over. If you keep those eyebrows raised and glance wide-eyed at the horizon you might just make out another whopping crisis looming. But is it?
The currency exchange controls, which limited dollar purchases, were first introduced in November 2011 after Fernández de Kirchner scored a landslide re-election victory the month before. Those controls were tightened to reach draconian levels in July 2012. The controls made much of public opinion anxious.
Axel Kicillof, who was named economy minister in November after the ruling coalition lost badly in all the major districts in last year’s midterm elections, called it in a recent interview with a pro-government newspaper “cultural anxiety.” Argentina’s middle class just needs to know it can get greenbacks at the bank to feel at ease. Most of those trying to get hold of a limited amount of dollars can now do so legally. But there’s a lot of people out there who are into tax evasion and still snapping up dollars illegally.
Plus there’s a pile of news to make the middle class even more “culturally anxious.” The Central Bank’s foreign currency reserves are dwindling and are now at their lowest since 2006.
It is in this context that the clamp has been relaxed. There is speculation that there is more relaxation on the way. But surely only if the dollar shortage ends and the Central Bank stops losing reserves? Reserves dropped US$170 million on Friday alone as the national government services debt, pays for imported fuel and tries to prevent the peso from weakening further.
A dollar is now officially worth eight pesos (and a bit). But in the black market at some point last month the dollar reached the 13-peso mark. All this with an annual inflation rate of at least 28-30 percent for last year, according to independent economists.
It is in this context that Kicillof is trying to relax the unpopular dollar clamp. Full details of that relaxation were released by Cabinet Chief Jorge Capitanich and the AFIP tax bureau chief Ricardo Echegaray on Monday. Dollars will be sold to registered workers and self-employed people who earn at least 7,200 pesos a month gross. They will be allowed to purchase the equivalent of 20 percent of their monthly net income a month, with a maximum of 2,000 dollars a month sold to each individual.
The purchases have to go through the electronic banking system, they can’t be done in cash directly. Lost already? Will this ease the, to quote Kicillof, “cultural anxiety” of Argentina? Each dollar purchase must be approved by AFIP through a website form.
Who knows what will happen, but check out the frontpage of The New York Times and you will see a photograph of hundreds of Argentines forming long lines outside banks in Buenos Aires to get their monthly dose of dollars. They are buying into Kicillof’s system even if there is no certainty about how it will end. The purchasers are being wooed into keeping their dollars in savings accounts for a year. If they don’t agree to do that they will have to pay a 20 percent surcharge, which technically can then be deducted from the annual income tax.
There was some sloppiness attached to the easing of the clamp. Kicillof had originally said that the 35 percent tax for credit card dollar purchases abroad would be reduced to 20 percent. But on Monday government officials declared that the 35 percent tax on dollar credit card purchases would not be lowered.
With the devaluation of the peso and the relaxation of the stringent currency exchange controls Capitanich and Kicillof are letting off some steam. The weaker peso is designed to make the economy more competitive again and putting dollars into the pockets of the middle class will hopefully make them less fidgety. But you don’t have to be Doctor Axel Kicillof to realize that the real anxiety is coming from the lack of dollars in the Central Bank’s coffers at a time it is importing fuel (worth at least 12 billion dollars last year) and trying to battle a black market that is trying to force up the price of the greenback to at least 13 pesos (with the support of the farmers, according to some observers).
Fernández de Kirchner, in office since 2007, has rarely offered press conferences. But the same can’t be said about Capitanich and Kicillof. Capitanich holds a daily morning press conference. Kicillof also takes questions, including from the opposition press, when making announcements.
Kicillof on Wednesday even used the term “devaluation” to describe what had happened to the peso in January. The 42-year-old economy minister has flatly denied that the devaluation should trigger sweeping price increases. The national government hammered out a “price watch” agreement with the country’s major supermarket chains early in January. But it is now battling to keep the accord in place. Capitanich and Kicillof announced on Wednesday, after meeting with industrial leaders, that price increases for electronic goods and home appliances with imported components would be capped at 7.5 percent. Increases for steel and other raw materials prompted by the devaluation were scrapped and prices were taken back to what they were on January 1. “A devaluation doesn’t mean that all prices of the economy must increase. There’s no logical reason that justifies such an increase. We carried out meetings with several manufacturing sectors and reached this agreement; thanks to it we are already seeing reductions in prices,” Kicillof said on Wednesday.
The International Monetary Fund, through its Western Hemisphere Director Alejandro Werner, said on Thursday said price controls have short life spans. Price agreements can “never be sustained in the medium term,” Werner said. But you could well argue that Argentina is the land where there is no middle term. Hyperinflation caused a crash in 1989. The financial meltdown brought everything down with a massive default in 2001. And you know what one famous economist (admired by Kicillof) said about the long term. In the long term we’ll all be dead, he said. And the middle term could well be another crisis for Argentina.
That learned IMF director could be right. But academics are still debating whether Argentina’s situation can be called an outright crisis. The jury is out. The whole world is watching the currency problems hitting emerging markets, including Argentina, Brazil and Turkey.
Capitanich has stated that the Central Bank’s dropping reserves is only a short term problem. The Cabinet chief then seems to be confident that there will be such a thing as a middle term. But Capitanich has also accused business executives of being greedy and farmers of hoarding their soybeans waiting for an even weaker peso before selling their harvest.
Fernández de Kirchner meanwhile, on attending the Community of Latin American and Caribbean States summit in Cuba, discussed “speculative pressures” against emerging markets with Brazilian President Dilma Rousseff. CFK was also photographed on Sunday in Havana with Fidel Castro, the veteran Communist commander who is now retired.
Fernández de Kirchner has also complained about private banks stoking the flames of devaluation and speculation. The president’s tweeting tirades once again included attacks against the opposition press. Fernández de Kirchner has made few public appearances since she was formally given a clean bill of health in November after undergoing head surgery to drain a clot lodged in her skull in October. But CFK is slowly upping her profile once again. She has scoffed at speculation that she was not fit to travel abroad.
Yet there was fresh concern about her health because on her return from Cuba the president checked into a private clinic in Buenos Aires complaining about back pains on Wednesday. An official statement released on Thursday said that CFK was suffering from swollen back muscles. Late on Friday the president once again lambasted the conservative broadsheet La Nación on Twitter saying that the critics want to see her “in crutches.”
The future of Fernández de Kirchner’s political reputation now depends on the success of Kicillof’s policies, which some experienced opposition economists (like former Central Bank chief Alfonso Prat-Gay) have called “experimental.”
The experiment also includes dealing with trade union salary demands. The national government managed to hammer out an agreement at the last minute on Friday with long-distance bus drivers who had called a three-day strike scheduled to start yesterday.
The UTA transport workers union, which is now on good terms with the powerful anti-government teamster Hugo Moyano, agreed to an increase in travel expenses of 70 pesos a day and to a hike of 1,200 pesos a month in anticipation of this year’s collective wage agreement. But there are many salary negotiations looming, especially the bargaining with the teachers. The anxiety has not gone away. Capitanich and Kicillof must navigate through February.