The Economy Ministry on Monday announced new measures to reduce the pressures on volatile currency markets and ward off devaluation, basically by bolstering the alternatives other than the official exchange rate to a surging “blue” parallel dollar.
The main innovation overturns mid-September capital controls imposed by the Central Bank to cut the so-called “parking” interval between bond transactions and the resulting currency exchange between pesos and dollars from five to three days for resident and non-resident operators alike. The Central Bank had previously extended the “parking” to 15 days in the case of the latter.
The monetary institution’s controls were aimed at restricting the CCL (contado con liquidación) exchange market cashing in bonds and had succeeded in that objective but, as Economy Minister Martín Guzmán told the IDEA business colloquium last Friday, it now suited the government to have a bigger CCL market to draw demand away from a soaring “blue” dollar.
Guzmán thus admitted that those controls had been an error because by reducing market liquidity, they had intensified volatility with a harmful effect on expectations.
Apart from reducing the “parking,” the Comisión Nacional de Valores (Argentina's equivalent of the US Securities & Exchange Commission) is also instructed to “favour intermediation processes to increase the liquidity of local [monetary] instruments” while the Central Bank is to repeal Point 5 of Communication A7106 barring non-residents from selling bonds for foreign currency in order to encourage local bond issue within regulated Argentine markets.
As a complementary move the Economy Ministry is to auction US$750 million worth of bonds as per Law 27,561 on November 9 and 10, which means that (under the new rules) these bonds may be sold as from November 13. These bonds are to be announced on November 2.
Economic analysts considered these new moves to be in the "right direction" but a "temporary palliative" (in the words of Estudio Ber economist Gustavo Ber) ahead of a plan delivering clear signals to correct fiscal and monetary imbalances and agreed with the International Monetary Fund (IMF), which they considered the only way to resolve the basic problems.
Illustrating the turmoil in Argentina’s currency markets, on the day of their announcement the measures failed to stop the “blue” dollar from climbing a further three pesos to a new high of 181 pesos (as against an official exchange rate of 83.21 pesos on Monday). As of Wednesday evening, the unofficial exchange stood at a record 183.
Invertir en Bolsa Fondos CEO Eduardo Herrrera described as “the most important move the Central Bank backtracking on its ban on non-residents selling bonds on the local market for foreign currency since this had removed a huge amount of liquidity from the market, pushing up the CCL and the MEP [mercado electrónico de pagos] exchange rates,” also praising the reduction of “parking” to three days as helping to close the yawning gap between official and parallel exchange rates, for calming the market in the short term. But in a longer run Herrera was sceptical due to negative expectations and a structural lack of dollars.
Analyst Christian Buteler insisted that the “parking” had to be eliminated, considering its reduction from 15 to three days to be useless while Ber said that the economic imbalances and the crisis of confidence (which he considered to have political aspects) had to be resolved if investors are to stop dollarising their portfolios.
The verdict of Ecolatina’s Matías Rajnerman was “too little, too late,” although he praised Guzmán for criticising in public Central Bank measures which obviously were not working with falling reserves and an ever broader gaap between exchange rates.
Guzmán had gained ground on Central Bank Governor Miguel Pesce, Rajnerman concluded.
Economist Fernando Marull agreed that the government had made good its mid-September errors in increasing the number “parking” days while excluding non- residents from the CCL market, which could now regain volume. He also praised the government for offering foreign investment funds a dollar bond as promised a couple of months ago, concluding that the two moves between them “should decompress demand for a while at least” although in a longer term “fiscal signals,” less money being printed, an agreement with IMF and an adjustment in the official exchange rate would all be needed.
LCG chief economist Guido Lorenzo pointed to the “complete contradiction” of first extending the “parking” and now reducing it while considering “what might do the trick is the auction, which could calm the foreign investors who want to pull out their dollars and today are being overcharged due to the CCL.”
Nevertheless, he doubted that the gap between exchange rates would be significantly reduced or that the CCL could fall much below 160 pesos.
Fernando Baer of Quantum Finanzas thought that these measures should ideally be combined with “clear signs of an economic course,” arguing that the MEP and CCL exchange rates might fall a bit but “the problem is that you need supply and for that you need prospects.”
Gustavo Neffa of Research for Traders analysed: “Cutting the parking will be less risky and draw a few more dollars from non-residents by brokering more a market which had been under too much pressure in both supply and demand so that the gap between the CCL and MEP should narrow more easily,” also judging as “positive” the tender for the US$750 million, “which I understand to be a promise to PIMCO and other funds stuck with peso bonds which had not been kept, allowing them to retire their money via the bond so that they do not pressure the CCL.”
Nevertheless, he warned that no underlying issues were thus resolved, “merely trying to formalise unblocking an activity on the understanding that it might bring some relief.”
Jorge Viñas of Adcap Securities affirmed: “These measures are doubtless better than those of a month ago but meanwhile time has been wasted and expectations eroded so that I don’t know what would suffice now to revert the situation.”
Eco Go economist Juan Paolicchi tweeted that the measures were “good news” although “without fiscal and monetary consistency there is no way they will still be working in two or three months’ time – without an economic plan the uncertainty will continue and the pressures on the dollar return.”
IMF Managing Director Kristalina Geogieva threw her support behind the measures.
"We will continue supporting the authorities while they work to ease exchange rate pressures, anchor economic stability and set the bases for recovery," she published on her Twitter account following a telephone conversation with Guzmán.
"Very valuable conversation today with the IMF managing director @KGeorgieva. Thanks! In the framework of productive dialogue, the IMF shares our vision that Argentina needs to tread the path towards stability and economic growth," responded the minister via the same social network.
Argentina has maintained capital controls since the last stages of the government of market-friendly Mauricio Macri in late 2019 to staunch the outflow of foreign currency, a system reinforced by his successor, Peronist leader Alberto Fernández.
Since 2019 individual dollar purchases have been capped at a monthly US$200, on which a 30 percent tax was slapped and since September 15 a 35 percent surcharge to discourage saving in foreign currency and halt the loss of reserves which now total US$40.795, according to the latest Central Bank balance, but barely US$5 billion are freely available, according to experts.
Gross reserves have fallen by over US$11 billion in the last year, accelerating in recent months despite very strict capital controls.
Although the volume of illegal market operations is tiny, especially with tourism restricted by the Covid-19 pandemic, it has a strong impact on market expectations.
"The regulations implemented on September 15 have tended to reduce market liquidity, occasioning a volatility which resulted in harming expectations," said Guzmán in a communiqué.