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ECONOMY: Crackdown on the currency market

On 11 November Argentina’s tax agency (Afip) said it had conducted simultaneous raids on 71 banks and exchange houses to crack down on suspected illegal currency trading.

After a month in the job, Argentina’s newly appointed central bank (BCRA) president, Alejandro Vanoli, can claim some success in stabilising the exchange rate. Over the last two weeks the Argentine peso has strengthened against the US dollar in the black market, and the gap between the black market ‘blue’ exchange rate and the government-set official exchange rate has narrowed. But analysts warn that these gains may only be temporary.

Currency dealers were under close scrutiny yesterday. Around 250 Afip agents raided their offices in Buenos Aires and other cities. Among the companies affected were Banco Mariva, Banco Columbia, Transcambio and Caja de Valores. Afip said it had detected “inconsistencies” in the accounts of four companies trading Ar$120m (US$14.1m at the official exchange rate) which suggested they had been acting as fronts enabling capital flight. Two brokerages, Arpenta and JR Bursatil, were suspended.

The tougher enforcement line followed by Afip and BCRA may have helped stabilise the currency. In the two weeks to 11 November the black market peso strengthened by 14% against the US dollar. But analysts are not convinced that the stronger peso is here to stay. They say that other short term factors have helped maintain currency reserves and stabilise the markets. These include the first phase of a currency swap deal with China which brought in US$814m; a new US$650m loan from Banque de France; an expected inflow of US$3.8bn of payments for agricultural exports; dollar inflows linked to the recent 3G and 4G mobile phone frequency auctions; and the government’s recent sales of US dollar-indexed bonds.

According to a study by local bank, Banco Ciudad, US dollar inflows between now and the end of the year will total around US$6bn, and will be balanced out by an equal amount of outflows (US$1bn in dollar purchases by the public and US$5bn in settlement of overdue payments to importers). That would suggest a fairly stable supply until year end: but the study also notes that the government faces US$15bn worth of debt maturities in 2015, plus a large and as yet unknown bill to settle its ongoing dispute with its ‘holdout’ creditors. Augustín Monteverde, an economist, has warned that the current stability is “an exchange rate fantasy” and that a new devaluation cannot be ruled out.

Afip targets multinationals

With foreign reserves at a record low of about US$28bn, the government is employing increasingly restrictive measures to prevent capital flight. On 2 November the tax agency (Afip) suspended the US consumer goods firm Procter & Gamble (P&G)’s import/export license, following an investigation into alleged tax fraud and capital flight.

Afip has accused the company of over-billing by US$138m on its imports in order to be able to repatriate money out of Argentina. The alleged fraud involves shipments of razors and other hygiene products. P&G is also accused of tax evasion. Argentina limits access to foreign currency in an attempt to shore up its falling international central bank reserves, which have fallen by over 17% in the past 12 months to US$28bn.

The punitive measure stops P&G from operating in the local foreign exchange market. “We need to put an end to this sort of tricks by global companies”, complained the head of the Afip, Ricardo Echegaray. “Our main goal is for P&G to repay the central bank the stolen currency as well as the customs sanctions and the income tax that has been evaded”. P&G denies any wrongdoing and says it is working to understand the allegations and to resolve any misunderstanding. P&G has been operating in Argentina since 1991 and currently runs three manufacturing plants and two distribution centres.

In 2006 P&G bowed to pressure from the Argentine government and froze prices for 31 products including shampoos, soaps and cream for at least a year in an effort to help the government combat inflation. The firm is likely to cooperate with the Afip in this latest case if it wants to continue operating in the country, but it is clear that relations with the Fernández government have become strained.

Just days later, in his monthly address to congress on 5 November, Cabinet Chief Jorge Capitanich announced that the US multinational, General Electric (GE), and Malteria Pampa, a local subsidiary of Brazilian brewer Ambev, also were under investigation for tax fraud. As with P&G, the government accuses GE and Ambev of overvaluing imports. Capitanich denounced the companies for engaging in “economic terrorism”. P&G have denied any wrongdoing, but Argentina has said it will only be allowed to resume operations once it has paid its tax bill and fines. GE and Ambev have yet to comment on the allegations.

Argentina is currently working on legislation to rein in tax evasion and alleged large-scale corporate currency manoeuvres.

PAMI under scrutiny

On 4 November Federal Magistrate Claudio Bonadio ordered an investigation into the National Institute of Social Services for Retirees (PAMI) over allegations of the misuse of public funds. With the sixth largest budget of any public body in Argentina, PAMI has grown rapidly in recent years. In 2007, it had 10,700 employees; now it has over 20,000, with a budget of Ar$45bn (US$5bn, at the official exchange rate). Yet none of the health centres the State has paid PAMI to set up is yet in operation. In the raid police officers gathered documents relating to the financing of three planned new hospitals.

The investigation was set in motion by the attorney general, Carlos Stornelli, following questions about loans made by PAMI to the government. Graciela Ocaña, an opposition deputy, questioned why PAMI was loaning the government large sums of money while “lowering the level of services it offers to pensioners”. Bonadio is also investigating loans made by PAMI to the treasury, through bond purchases.

The PAMI director, Luciano Di Cesare, is a close of associate of President Fernández. Di Cesare and his second-in-command, Mariano Cardelli, began working for Fernández’s late husband and predecessor, Néstor Kirchner (2003-2007) in the southern province of Santa Cruz in 2003. Di Cesare took over at PAMI in 2007. Though the institute was cited in a number of corruption cases during the time of the Carlos Menem administration (1989-1999), to date it had not faced scrutiny under the Kirchnerista administrations.

  • Private sector labour market weakens

According to official data, the unemployment and the underemployment rates were 7.5% and 9.4% respectively in the third quarter. Various surveys have shown that a majority of large private sector employers have been laying off staff or, leaving vacancies unfilled. The situation would be worse but for the expansion of public sector activity. In the first eight months of this year, the main indicator of public sector activity reported by the national statistics institute was up 4.6% year-on-year.

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