Wednesday, June 13, 2012

The Sinking Argentine Peso

US Dollars

1 Peso Argentino
As I pointed out in my blogpost about YPF, the inflation of the Argentine Peso is pretty high. It is becoming a burden for the population as well as for the Argentina government. It is almost impossible for ordinary citizens to legally buy dollars. Citizens have to jump through many bureaucratic hoops to purchase US dollars. The official exchange rate is 4.70 Peso. The black market exchange rate is 5.71 Peso and getting higher.

Julio Argentino Roca (1843–1914)
on an Argentina 100 Peso banknote
The near-impossibility of buying dollars at the official rate is driving some savers and investors to pay a hefty premium of 33% in the black market now, while it was 8.5% in December 2011. Cristina Kirchner is doing the outmost to prevent dollar capital flight. Argentines have sent about $200 billion (U.S.) overseas because of Cristina Kirchner’s economic policies. As explained here the Cristina Kirchner government made some innovative moves (YPF expropriation, nationalizing private pension plans, using the central bank’s foreign-currency reserves for debt payments) to decrease the dollar shortages. Dollars are badly needed to finance high government spending and debt obligations. Since Argentina is not part of the international financial community it cannot access international credit markets and does not have portfolio flows or investment flows. Argentina's trade surplus, which is decreasing, is the only source of dollars. Kirchner ordered intensive border control to fight capital flight. AFIP, the Argentine tax agency is fighting black market dollar trade intensively, but is also collecting taxes more strictly. Cristina Kirchner has ordered Argentine energy producers and miners to repatriate export revenue and told insurance companies to bring money invested abroad into the country. The government has also clamped down on imports to prevent dollars flowing out of the country. In Brazil, Argentina’s biggest trade partner, the real slumped 20 percent over the past 12 months while the peso weakened 8 percent.


(Real) Inflation in Argentina
Average last 30 days vs. same period last year
Another issue is the high inflation; official figures say inflation is about 10%, but realistic figures say it is about 23%. The main cause of inflation is public spending, but also fiscal and income policies play a role. Some observers point to Argentina’s Central Bank's monetary and currency policies in support of the economic expansion by maintaining an undervalued or “competitive” exchange rate and negative real interest rates. Since 2007 Argentina’s government has published inflation figures through INDEC that almost nobody believes. These show prices as having risen by between 5% and 11% a year. Independent economists, provincial statistical offices and surveys of inflation expectations have all put the rate at more than double the official number. In an extraordinary abuse of power, independent Argentine economists have been forced to stop publishing their own estimates of inflation by fines and threats of prosecution. History has left Argentines with more than their share of economic trauma. Having twice suffered destructive bouts of hyperinflation in the late 1980s, they are sensitive to rising prices. When they spot inflation their instinct is to dump the peso and buy dollars. 

What to do with your savings in Argentina?

Argentina - (Real) Consumer Price Index
December 1st 2007 equals 100
Cristina Kirchner pledged  this month (June 2012) to turn her own dollar savings into Pesos and urged ministers to do the same. These days it's being investigated by the Argentine press if the Cristina Fernandez family hotels Casa Los Sauces  and Alto Calafate in El Calafate, Patagonia  still bring US Dollars into the country, which in itself is a good thing, and if these dollars are exchanged into Pesos?  Part of the population is fearing moves by the government that will forcibly “de-dollarize” the economy. So what to do with your savings? If you have savings, the smartest thing to do (but nearly impossible now) is to keep them in a foreign dollar bank-account. One possibility is keeping your dollars cash in a safety deposit box, another option is to trade in your old car for a more expensive new model and pay in dollars. Car dealers offer "cheap" dollar rates, that is cheap in relation to the black market exchange rate. You could also try to put your savings in real estate e.g. your own home. Unfortunately the housing market in Argentina has almost come to a stand-still. Sellers only want to get paid in dollars at the black market exchange rate and since there are so little dollars and the exchange rate is so high, nobody wants to buy. Unfortunately there is practically no other alternative for the average Argentine citizen than to spend his savings.

Argentina - Official Inflation 2008 - 2012 according to INDEC

The Argentine economy is cooling down in 2012 but still growing, however this year's growth rate (est. 3%) is considerably lower than 2011's (8.9%). So it's unlikely that dollar demand will decrease in the near future. Argentina’s risk of default is the highest versus Venezuela in three years. The cost to insure Argentine bonds against non-payment for five years has soared 394 basis points, or 3.94 percentage points, to 1,316 basis points this year while the cost to protect Venezuelan debt rose seven basis points to 945, according to data compiled by Bloomberg. This story is unlikely to have a happy ending. 

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