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ECONOMY | 17-10-2023 16:02

Baffling Argentina FX rates on borrowed time as election nears

The hodgepodge of currency controls put in place in Argentina is likely in its last days. 

The hodgepodge of currency controls put in place in Argentina is likely in its last days. 

Libertarian Javier Milei and pro-business Patricia Bullrich, two of the main contenders vying for Argentina’s Presidency in a first round of voting this weekend, have vowed to do away with a myriad of different exchange rates that co-exist in the nation.  

For years, the country has restricted the peso’s daily decline through currency controls, and import restrictions to protect dwindling reserves. One dollar fetches 350 pesos on the official rate, which is used to import products such as pharmaceuticals, while it goes for 950 pesos on the black market — down almost 40 percent since mid-August, when the government last devalued the official rate after Milei’s surprise showing in the primary election. 

The ruling coalition, represented by Economy Minister Sergio Massa in the race, has already begun dialling back on some of the more niche rates it implemented, which included the ‘Coldplay dollar’ — for concert organisers — and the ‘Malbec’ — for agriculture exports.

Milei, seen as the favourite in Sunday’s first-round vote, has vowed to scrap the local currency altogether, replacing it with dollars. Some economists warn it would fuel a temporary spike in inflation that is already running at over 138 percent.

 

A devaluation is “already overdue” and will likely reach as much as 50 percent from current official levels, said Alberto Ramos, chief economist for Latin America at Goldman Sachs Group Inc. “The trend is for the peso to continue to depreciate, and once dollarization is announced or confirmed, it should depreciate even further.”

 

Concern about the approaching vote has already taken a toll on the peso, with the black market rate hitting a record 1,040 per dollar earlier this month as Argentines rush to buy greenbacks before the October 22 presidential election. 

 

“It’s extremely difficult to estimate the rate at which pesos would be converted into dollars, but reasonable to expect that rate would be weaker than the current ‘dollar blue.’ That’s fuelled demand for dollars by Argentines who want to protect their purchasing power ahead of the vote,” said Adriana Dupita, Bloomberg’s Latin America economist.

 

Here’s a quick rundown of the most commonly used rates in Argentina and where they are ahead of Sunday’s vote: 

 

The Official Rate

Rate: 350 pesos per dollar

Argentina’s official exchange rate is highly restricted. Individuals can only legally exchange pesos at a bank at the official rate for no more than US$200 a month and must pay three taxes that double the cost. Economists are forecasting a sharp devaluation of the official rate after the nation’s elections this weekend.

 

The ‘Blue’

Rate: 980 per dollar

The most-commonly accessed rate among Argentines, the ‘dólar blue’ is a free-floating, all-cash exchange rate you can get in back-rooms of stores, newspaper stands or in inconspicuous offices — or a contact willing to exchange dollars for pesos, sometimes requiring large shopping bags or backpacks to carry wads of the local notes. 

 

The Blue Chip

Blue-chip rate: 932 per dollar

Argentina also has free-floating exchange rates for investors who buy stocks and bonds. For local transactions, an exchange rate known as ‘dólar MEP’ is used, while the blue-chip swap rate, or ‘dólar CCL,’ is utilised for operations that finish abroad — providing an approximation rather than a clear benchmark. 

 

The Tourist Dollar

Rate: 735 per dollar

Argentines are charged three separate taxes that amount to 100 percent on top of the official exchange rate when they use their Argentina-based credit or debit card to make a purchase in a foreign currency, a strategy by the current government to discourage spending abroad. 

 

Luxury Dollar

Rate: 700 per dollar

Well-to-do Argentines who buy luxury goods including private jets, sports cars, yachts, watches and top-shelf alcohol need to pay additional levies of nearly 100% on top of the price of the imported goods. 

 

Tech incentives 

Tech companies can retain 30 percent of the dollars from sales abroad instead of having to exchange them into pesos. The dollars are meant for employees’ salaries.

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by Kevin Simauchi & Scott Squires, Bloomberg

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