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ARGENTINA | 02-09-2019 09:16

Argentina returns to capital controls as Macri fights to survive

Decision to impose currency controls represents a bitter irony for the pro-market President Macri, who set about dismantling them as soon as he took office in 2015.

President Mauricio Macri imposed capital controls in a blunt policy reversal aimed at containing the country’s escalating financial crisis and earning a slim chance at re-election – or at least seeing out the remainder of his presidency.

In a rare Sunday intervention, the Central Bank ordered exporters to repatriate foreign currency from the sale of their goods within five days, among other measures. Corporations will require the authorisation of the bank to buy dollars in the foreign-exchange market, except in cases of international trade. Individuals, meanwhile, will be limited to dollar purchases of no more than US$10,000 a month.

The move represents a bitter irony for the pro-market president, who set about dismantling capital controls as soon as he took office in 2015. Amid rising public panic and the looming specter of default, Macri is trying to stanch the hemorrhaging of dollars from the country by ripping up his orthodox economic playbook, reintroducing the kind of interventionist policies he once excoriated.

With presidential elections eight weeks away, Macri trails former cabinet chief Alberto Fernandez by a seemingly insurmountable distance. While the latest measures are unlikely to turn the tide, they may help Macri become the first non-Peronist president to finish his constitutional term in recent Argentine history. The knee-jerk reaction by investors was to dump more of the nation’s assets, as seen in a plunge in euro-denominated bonds due 2022.

“There’s a phenomenal crisis of confidence in the economy, and the government is trying to patch up the effects of this crisis with the controls,” Fausto Spotorno, economist and director of the Orlando Ferreres & Asociados consultancy in Buenos Aires, said. “We still don’t know if these patches will work.”

'Capital flow management'

In a note published later on Sunday, the International Monetary Fund described the move as “capital flow management” and stated that it would “continue to stand with Argentina during these challenging times.” Last week the Macri administration announced plans to renegotiate payments on US$44 billion it has borrowed from the IMF.

Speaking on local TV late on Sunday evening, Economy Minister Hernán Lacunza said that though the measures might be uncomfortable they would avoid worse outcomes. “Argentina is like a boat stuck in circles, always returning to the same port. This isn’t the port we dreamed of,” he said. “Now the challenge is to dock the boat on the pier on the 10 December.” That date is when Macri’s mandate ends.

Macri’s vice-presidential candidate Miguel Ángel Pichetto also told local media that the government had taken the decision to ensure that volatility and short-term lack of liquidity did not impact Argentines. “When the dollar rises, supermarket prices go up,” he said.

The campaign has taken a backseat role as the government focuses on reassuring Argentines, according to an official from the presidency who declined to speak on record. While it’s worse to campaign with currency controls in place, it’s even worse with the exchange rate spiralling out of control, the person added.

Deepening crisis

Sunday’s move shows how the crisis has moved beyond international bond investors to affect ordinary Argentines, who may choose to save in dollar bank accounts.

In the aftermath of the August 11 primary elections that showed Fernández on course for victory in October, depositors withdrew hundreds of millions of dollars from their accounts – cash the Central Bank counts as part of its gross foreign reserves. These withdrawals, coupled with policy makers’ sale of dollars to shore up the peso, has led to a dramatic fall in the country’s stock of reserves.

Around US$3 billion drained out of the foreign-currency reserves on Thursday and Friday alone after the government changed the terms for its short-term debt. The country risks exhausting its net reserves, which stand at under US$15 billion, within weeks if it keeps losing money at this pace.

The return of populism in Argentina is scaring the “dickens out of emerging-market investors,” said Stephen Innes, an Asia-Pacific market strategist at AxiTrader in Bangkok. Bonds due 2022 declined about 6 cents on the euro to 35.31, according to prices compiled by Bloomberg.

Currency collapse

The peso depreciated more than 25 percent last month after primary election results showed the market-friendly government has little chance of retaining power. Interest rates soared as the Central Bank tried to roll over debt, culminating Wednesday in a decision to delay payments on $7 billion of bills coming due this year.

Opposition advisers had called for currency controls. Fernández himself said the government was in “virtual default” but added that he was unwilling to support the emergency measures designed to control rising volatility. Total central bank reserves have slumped to US$54.1 billion, from US$66.4 billion the day before primary.

As well as pushing back maturities on local short-term debt on August 28, Argentina also said it will ask holders of US$50 billion of longer-term debt to accept a “voluntary re-profiling.”

Fitch Ratings now classifies Argentine debt as 'RD, 'or restricted default; Standard and Poor’s as 'CCC-'; and Moody’s as 'Caa2.' Credit default swaps are pricing in a more than 90 percent chance of a fully-fledged default within five years.

For Juan Díaz Cruz, the director of political risk advisory firm Cefeidas, the economy minister and the Central Bank will have to adopt further measures in the days to come.

“Today the objective seems to be to contain the economic and financial deterioration,” he said. “To generate greater credibility in the ability of the government to make it to the elections at least minimally competitive.”

Measures:

Here is a list of some of the measures announced Sunday:

  • Central Bank sets deadline for repatriation of foreign earnings for exporters.
    • Repatriation must be made within 5 days of payment or within 15 days of receiving the shipping permit in the case of grains, whichever is quickest
    • Other exporters have 180 days from the date of the shipping approval.
  • Argentines can only buy as much as US$10,000 a month, or transfer the same amount to a foreign account that doesn’t belong to them.
    • Limit is US$1,000 in the case of non-residents.
  • All companies must request permission to distribute dividends abroad or to buy dollars in the foreign exchange market.
    • They can’t buy dollars for savings purposes.
    • No restrictions for dollar purchases aimed at completing foreign trade transactions.
  • No limits to companies and savers that want to withdraw dollars in cash from their accounts.
  • No currency restrictions on tourists or Argentines abroad.
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