If you spell ‘cepo’ backward, you get OPEC (the cartel of oil producers who brought all post-war booms to a shuddering halt just over half a century ago) and it might well be argued that this seemingly endless set of currency and capital controls has been a similar bane of Argentina’s existence, choking inflow even more surely than outflow and shackling any sustained development beyond the stop-go variety.
Well, we might just be entering into its final month, according to some forecasts – should the remittances accompanying the upcoming agreement with the International Monetary Fund (IMF) approximate the upper end of expectations at around US$20 billion, the government might just take the plunge with Economy Minister Luis Caputo insisting that there are simply not enough pesos for a run on the currency (having printed none on his watch) although some economists like Miguel Kiguel warn that there are more pesos between the cracks than generally suspected (not to mention the international turbulence incessantly fuelled by Donald Trump). Every probability that the IMF will simply not cough up enough or that avoiding the inflationary risks of a premature release of exchange controls will prevail but just in case today’s column will start writing the cepo’s obituary.
The general aim of this column as expressed by its slug is to give issues a historical and international context, rather than tackle them directly or debate the merits and the cepo will be a case in point. Oddly enough, the many victims of the OPEC mentioned at the start of this column included its reverse spelling in the form of capital controls – widespread during their origins in World War I, enshrined by the Bretton Woods system and Keynesian economics following World War II and more sporadic in the years after the 1973-1974 oil crisis with globalisation the antithesis although lingering longer in many emerging markets.
A post-war quarter-century of the Keynesian penchant for capital controls was followed by free market consensus in the next quarter-century but then the tide again started shifting on the cusp of the millennium. The catalyst was the Asian financial crisis of 1997 starting in Thailand with its neighbour Malaysia a pioneer of the capital control revival – especially under Mahathir Mohamad, that country had a happy knack of obtaining good results from bad policies (its bumiputra positive discrimination in favour of Malays is another example). Malaysia installed capital controls including a frozen exchange rate in September, 1998 and removed them the following September with their work done, resulting in a rapid economic recovery with minimal impact on jobs and real wages. Argentina might have taken note of this example but no.
Yet the real challenge to orthodoxy came from the 2008-2009 global meltdown, in turn the result of capital movements on a scale via derivatives, subprime mortgages, etc. which seemed to beg for some form of control – the cepo here was born in the later stages of the aftermath of that crisis. Quantitative easing or monetary expansion to replace the obliterated pseudo-assets (Britain’s money supply increased fourfold while trebling in the United States) implied even more control to avert currency wars. Reflecting how much conventional wisdom had been rocked, the IMF virtually ordered Iceland to impose capital controls as a condition of its rescue package. Especially during the meltdown’s aftermath around 2010, capital controls were the name of the game in all the BRICS (Brazil, Russia, India, China and South Africa), other G20 countries like South Korea, Indonesia and Mexico, Peru and Colombia in South America and even the free-market beacon of Taiwan, among numerous other nations, although by then the European Union was too much of a single market to follow suit – Argentina was one of the last to join this club. The general conclusion from this wide range of examples was that capital controls are beneficial in the short but not the long term.
When the recently widowed Cristina Fernández de Kirchner won her 54 percent landslide in 2011 and proclaimed “Vamos por todo” (“We’re going all out”), the cepo was virtually the first thing she meant, starting in the same month. The cepo should not be confused with currency controls, which date back much further – in the half-century between 1931 and the exit of José Martínez de Hoz in 1981, it would be hard to find a year in which the exchange rate was not tweaked in some way except for the 1955-1964 decade, also returning in the wake of the 2001-2002 collapse. But clamping down on capital movements, blocking capital flight at the price of influx, was Cristina’s innovation, entering into full flow as from mid-2012 and becoming increasingly bureaucratic with escalating obstructionism from AFIP tax bureau and a 35-percent surcharge slapped on credit cards abroad.
Following a certain relaxation of the cepo in the final year of a Kirchnerism in retreat, Mauricio Macri boldly freed exchange markets in the first week of his presidency in late 2015, a monetary audacity not accompanied by his fiscal gradualism. This was to carry its price – lifting capital controls is normally a great idea, inspiring the animal spirits of business, but not while inflationary pressures persist, the country is in debt (massively boosted by a US$44-billion IMF stand-by in 2018) and foreign currency reserves are low. The peso lost 30 percent of its value in short order and capital flight reached US$86 billion to double the IMF anchor. The month after the catastrophic “game over” PASO primary of August, 2019, then Economy Minister Hernán Lacunza was forced to restore the cepo with monthly dollar purchases limited to US$10,000, drastically slashed to US$200 the following month.
Several more turns of the screw under the ensuing Frente de Todos administration (such as the 35 percent surcharge on dollar purchases against income tax) and while there has been some relaxation in the last 15 months by the current libertarian government with a monetary gradualism to rival Macri’s fiscal gradualism, enough remains for Carlos Pagni to accuse President Javier Milei of “Austro-Kirchnerism.”
So when will the cepo end – next month, this year, sometime or never? We will just have to wait and see (the motto of almost every overseas investor).
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