On 22 September Argentina’s President Alberto Fernández defended his government’s decision to impose tighter currency controls, insisting that this is a temporary but necessary measure to protect the national economy.
Analysis:
Fernández’s remarks come amid growing concerns by economists that the controls will not succeed in stemming the fall in Argentina’s international reserves and have further eroded confidence in the peso, which could serve to ultimately accelerate the onset of a new currency crisis. The staunch defence of the controls and prospect that these could be extended will only heighten concerns of an impending crisis that could produce serious social upheaval.
- Last week Argentina’s central bank (BCRA) imposed a series of new restrictions on the purchase of US dollars by Argentine firms and individuals. These included further limiting the amount of dollars that can be bought in the domestic currency markets for saving purposes and the introduction of a surcharge of between 30%-35% on payments made with dollars. The BCRA said the new restrictions are needed to supress the domestic demand for dollars and “guarantee” the availability of foreign currency amid the sustained fall in its foreign reserves, into which BCRA has been forced to dip to maintain the official exchange rate.
- But the new controls have only had limited success in stopping the haemorrhaging of BCRA reserves, which have continued to fall (they stood at a three-year low of US$42.2bn yesterday) as individuals increasingly withdraw dollars deposited in Argentina’s financial system. Meanwhile the demand for dollars has also not lessened - as evidenced by the increase in the unofficial exchange rate, with the ‘contado con liquidación’ alternative exchange rate at Ar$148/US$1 yesterday compared to the official rate of Ar$79.65/US$1 (the Argentine peso is trading at an even lower Ar$311/US$1 in neighbouring Uruguay).
- The growing discrepancy between the official and unofficial exchange rates has set off alarm bells. Economists warn that it is a sign that confidence in the peso and Argentina’s economy is dangerously low and that this could lead to a major run on the peso that could end up depleting Argentina’s foreign reserves and spark a financial crisis. The consensus view among economists is that to avoid this the government cannot simply rely on currency controls but needs to come up with measures that will help to restore confidence in the peso and the national economy as part of a comprehensive economic plan.
- However, President Fernández defended the continued use of currency controls. Speaking during a business event in Buenos Aires province yesterday Fernández admitted that currency controls are not ideal but insisted that these are a necessary emergency measure to “protect” the government’s dollar reserves. Fernández went on to call on Argentines to rely less on imports and buy national products to help stimulate domestic production and reduce the reliance on dollars.
Looking Ahead: Concerns about Argentina’s economy look set to deepen further following the formal presentation of the 2021 draft budget to congress. The budget projections of 5.5% GDP growth and an exchange rate of Ar$102.4/US$1 have been dismissed as “unrealistic” by the opposition and many economists.
