Argentina’s
Shrinking Currency Reserves Point to Further Controls
By Ken Parks
The Wall Street Journal, September 24, 2013
BUENOS AIRES — Argentine President Cristina Kirchner may have to impose
further U.S. dollar rationing on her citizens in coming months as the slide in
the hard currency reserves that Argentina uses to pay its import bill and
creditors shows no sign of abating, analysts say.
Argentina faces significant dollar outflows at a time when the
foreign currency provided by trade, the South American nation’s only
significant source of the U.S. currency, is shrinking due to surging fuel
imports.
The trade surplus accumulated between January and August narrowed
by 32% on the year to $6.29 billion, the government said Monday. With the last
few months of the year a seasonally slack period for exports, the Kirchner
administration may struggle to reach its latest target of a $10.6 billion
surplus in 2013.
If the government’s past behavior is any indicator of future
behavior then more belt tightening could fall on tourism and imports. Net
dollar outflows from tourism rose to $4.53 billion in the first half as
Argentines continued to travel and shop abroad even after the government
slapped a special 20% tax on those activities.
“We believe they will need to put the brakes on the outflow of
hard currency via tourism,” says Mauricio Claveri, an economist at
research firm Abeceb. “The trade surplus isn’t going to compensate and there is
going to be a loss of reserves.”
Deutsche Bank economist
Gustavo Canonero thinks the government will likely muddle through by fine
tuning the currency controls and import restrictions it has used to keep
dollars from leaving the country.
“They will have to ration international reserves even more than
today and that means you are going to have less imports for growth and
therefore the economy will be stagnant,” Mr. Canonero said.
A spokeswoman for the Economy Ministry declined to comment.
For almost two years, Mrs. Kirchner has subjected Argentines to
unpopular foreign-currency restrictions. Businesses can face long delays to
import equipment and materials, which usually have to be paid for with dollars.
“We are at a very dangerous point where [additional] limits on
imports will have very negative collateral effects on the economy and job
market,” says Diego Perez, president of Cira, an association that
represents importers
Argentines are also banned from buying dollars to protect their
savings from one of the highest rates of inflation in the Western Hemisphere,
while the government doles out very limited amounts of foreign currency for
tourism. Some people have turned to the black market for dollars, where they
pay a 63% premium compared to the regulated foreign exchange market.
Reserves at the central bank fell to a six-and-a-half year low of
about $35 billion on Friday, down 19% from the beginning of the year and well
below a record $52.7 billion in January 2011.
Unable to borrow abroad due to the high interest rates lenders
demand, Mrs. Kirchner has used at least $27.5 billion in reserves to pay
creditors and fund public-works projects. Her 2014 budget proposal would tap
another $9.86 billion for the same purposes.
The steady decline in reserves could spell trouble for Argentine stocks
and bonds if investors start to question the government’s ability to pay.
The government needs to quickly stabilize reserves or risk a
selloff in dollar debt like the Boden 2015 bond and debt-linked securities,
says Siobhan Morden, head of Latin American strategy at Jefferies.
“The pace of decline and the level are now both a concern,
especially if this pace of reserve loss continues into next year,” Mrs. Morden
said.
At the current rate of depletion, reserves could drop below $20
billion in the first quarter of 2015. That could set markets up for a “moment of tension” because
the central bank would have only a thin cushion of liquid assets on hand at
that point, says Orlando J. Ferreres, an economist and former
deputy economy minister.
“There isn’t an easy solution. These are problems that will take
three to four years to fix from the moment you start fixing them,” Mr. Ferreres
said.
Those problems include annual inflation that many economists say
has been running at or above 20% for years as a result of the central bank
printing pesos to finance government spending.Official data put economic
growth at 1.9% in 2012, and the government has forecast 5.1% growth this year and
6.2% in 2014. Many economists say those projections are unrealistic for an
economy hobbled by dollar shortages and inflation.
Barclays Capital economist Sebastian Vargas is
optimistic that a weak economy will eventually force Mrs. Kirchner to adopt
more pragmatic policies such as moderating spending and mending fences with
foreign creditors.
“If the government continues with monetary financing and doesn’t
change its agenda the foreign exchange reserves could deteriorate further and
that would have an impact on investment,” Mr. Vargas said.
