Argentina’s standing in global markets is at risk once again after it moved this week to further restrict access to dollars as foreign reserves dry, a move analysts say will hit its much-needed economic revival and investor sentiment.
The central bank on Tuesday tightened the noose for dollar purchases, adding a 35% tax on people who tap a $200 monthly quota, and said card payments abroad would be included in the allowance. It also limited corporate access to foreign currency.
The move sparked a selloff of Argentine bonds and stocks, while the price of dollars in unofficial markets spiked, widening a large gap with the official rate. It also put Argentina’s inclusion in the MSCI Emerging Markets Index at risk.
“It shows total desperation,” said Agustín Monteverde, an economist at consultancy Massot Monteverde & Asociados in Buenos Aires. “They have just hung a sign around their necks that says ‘meltdown’.”
The tightened controls underscore how Argentina’s left-leaning Peronist government is struggling to unwind interventionist policies that have long dogged the resource-rich country, despite sealing a major recent debt restructuring deal.
The central bank now finds itself in a precarious position, with net reserves having fallen to as low as $6.8 billion including holdings of gold, according to a J.P. Morgan estimate, despite capital controls put in place last year.
Barclays said in a note that the controls would “buy some time,” but the measures, together with the country’s forecast for a deep 4.5% fiscal deficit in 2021, raised worrying signals.
“This is more evidence that authorities are not willing to address the fiscal and monetary imbalances driving the capital flight and reserves drain. And they weaken growth prospects.”
The South American nation is headed for a 12% economic contraction this year, which would mark the third straight year of recession, and is just emerging from its ninth sovereign default after restructuring nearly $110 billion in foreign currency debt.
It faces negotiations with the International Monetary Fund to delay more than $40 billion in payments due in the next few years. Investors said tighter controls could muddy those talks.
Capital controls have created a nearly 90% divergence between official and unofficial peso rates, while the central bank has been printing money to help support emergency government measures to battle the fallout from the coronavirus pandemic.
Meanwhile, dollar demand has remained high, with Argentines long wary about the stability of their currency and high inflation, and fearful of a repeat of the draconian measures of previous governments, including forced conversions of dollar deposits to pesos.
Central bank reserves are officially at $42.5 billion, though on net terms could be as low as $2.9 billion, excluding gold, J.P. Morgan calculates. That would be down from a comparable $10.1 billion at the end of last year.
KICKING THE CAN
Gustavo Ber, chief economist at consultancy Estudio Ber, said the tightened controls had a negative impact on traders.
“Within a climate of mistrust, these would-be measures do not resolve underlying imbalances, but can only stretch out the process of draining reserves over time,” he said.
J.P. Morgan said in a note that it was matter of Argentina “kicking the can down the road”.
“In all, we see in these measures a temporary policy arrangement that does not tackle the factors behind the monetary disequilibrium, while jeopardizing the pace of an already timid activity recovery pace post-COVID-19.”
The measures will hurt companies’ access to dollars in the official market for settling debt services, with the government looking to encourage firms to lower their debt loads in foreign currency.
President Alberto Fernández defended the measures, saying dollars should be for investment, not savings.
“We are building the logic of an economy that no longer promotes speculation and wants dollars to stop being a speculation tool,” he said.
Some 3.9 million Argentines bought dollars in August in the official market, according to estimates from market operators. Many sold them immediately in informal markets, where they can turn a quick profit due a much high dollar valuation there.
Economists said the move dimmed hopes for a solid macroeconomic plan that would generate confidence in the country, lower pressure on the peso and lead to dollars coming back via investment.
“The government had two paths: to finally propose an economic program that would allow it to get out of capital controls and allow public accounts to be put in order, or a new very restrictive tourniquet,” said Fausto Spotorno, an economist at the Orlando Ferreres & Asociados consultancy.
“The latter is what it has just done.”