Argentina’s dollars are in a tailspin again
With inflation over 100%, rumours of devaluation and dollarization were a spark in the tinderbox
Avast, me hearties!
It’s been a while! I’ve mainly been at the helm of the newly-relaunched Buenos Aires Herald lately - but with Argentina’s inter-annual inflation running at over 100% and the International Monetary Fund breathing down the government’s neck in the run-up to an election, there’s a lot happening, so it seemed like time for an update. Besides, we can’t let the Colombian crew have all the fun.
You must forgive me for the lateness of this column: every time I sat down to write, there was another political meltdown. Yesterday, that came in the form of President Fernández’s announcement that - unusually, for an eligible sitting president - he would not run for a second term in office. Hey, it keeps me on my toes.
Argentina has felt like it’s in a crisis for at least the five and a half years that I’ve lived here, and yet unlike many crises, it’s often hard to put a finger on why, exactly, the country is in a crisis. If you ask, you’re likely to be met with answers that revolve around an unfeasible amount of Argento jargon about “the blue”, “the cepo” and “the Merval”. If you’re particularly unfortunate, you may stumble head-first into a debate about the difference between LELIQs and LELITEs. Confused yet? Me too.
This Tuesday in the newsroom, between high-profile resignations, growing talk of dollarization and “the blue” doing its thing, it felt like the market was yelling “Brace, brace!” I wrote a brief thread on Pirate Wire Services’ Twitter account explaining what was going on, and since the news has been coming thick and fast, I suggested to the crew that I could briefly take the helm to elaborate.
So, here’s why Argentina’s parallel dollars are in a tailspin again.
Argentina’s blue (informal) dollar has broken record after record this week. On Tuesday, it was trading at 420 pesos to the dollar, a record at the time, but at the time of writing, it had peaked at 440.
This is a sign that all is not well in the economy - and this is an economy that is unwell to begin with. But before we get to what’s wrong, let’s discuss why everyone looks to the informal dollar in the first place.
Argentina’s government restricts access to dollars: you can’t just go to a bureau de change and get, say, US$1,000 before you travel. If you live in Argentina, you can buy up to US$200 per month, as long as you fulfill a set of criteria: you aren’t receiving state energy subsidies, you aren’t signed up to certain kinds of welfare, you haven’t made certain kinds of financial market transactions, and so forth.
Moreover, the dollars that you can buy, and any foreign-currency purchases you make, are subject to two taxes that between them make those dollars 76% more expensive. You can claim some of that back if you have the patience of a Patagonian mountain rock, but let’s ignore that for the moment.
Likewise, businesses are subject to restrictions accessing dollars, which creates difficulties for those that need to import goods.
That gives rise to a flourishing informal market in which you can buy as many dollars as you like at a rate known as the “blue dollar”. The blue dollar is thought to move millions of dollars a day and its rate can be checked everywhere from dedicated websites to major national newspapers - but it’s technically illegal.
Other exchange rates are derived from market operators buying assets in pesos and selling them in dollars.
Devastating drought
This year, a crippling drought has slashed harvests of key commodity crops, especially soybeans, cutting billions of dollars from export earnings and international reserves alike.
In order to placate (or punish) certain sectors of the economy, the government has implemented a whole flotilla of ridiculously-named alternative dollar exchange rates (Qatar dollar? Coldplay dollar!). The whole situation makes it difficult to say what the Argentine peso is actually worth.
Meanwhile, the Central Bank’s official exchange rate is indexed to the dollar by a “crawling peg”: not a fixed rate, but a “controlled”, systematic devaluation. That means there can’t technically be a run on the peso leaving everyone’s savings worthless overnight. However, economic actors set little stock in the official exchange rate. So when there’s a run on the parallel dollars, it typically spells trouble.
Dollarization
That brings us on to this week. Three major factors have sent the markets into a tailspin. Far-right libertarian economist and presidential candidate Javier Milei has been increasingly loud about his plans to dollarize the economy. On Tuesday, he presented his plan to influential business leaders at an annual gathering of the movers and the shakers known as the Llao Llao forum.
Most serious analysts think that dollarizing would mean deep pain for the people. But his plan is gaining traction. CC party leader Lilita Carrió nailed it: people think dollarizing will bring them dollars. Yay! Coca cola for everyone! But in reality, it would probably use a brutal exchange rate that would reduce salaries and savings to zilch. There has been a great deal of speculation about what, exactly, the rate would be: some say 800, others say 8,000. The point is, that would be a sharp shock to a society still clinging to the vestiges of the notion that one dollar is worth ARS220. And, with Milei gaining in the polls, Argentina is starting to view a Milei electoral victory as a realistic prospect.
Chief Presidential Advisor Resigns
Then, later on Tuesday, with the cat already among the pigeons because of Milei’s comments, President Alberto Fernández’s Chief Advisor Antonio Aracre abruptly quit just over two months into the job.
It emerged that on Monday, Aracre had presented the president with a proposal to contain inflation, which included the recommendation of a 30% devaluation, a document viewed by my colleagues at the Herald. By Monday night, some journalists were claiming that Aracre would take Economy Minister Sergio Massa’s job.
In light of rumors of a possible devaluation, exporters of crucial commodity crops stopped liquidating their sales in the currency market, forcing the central bank to sell reserves and driving the rise of the parallel dollars.
The end of a dramatic week came with a sting in its tail, too: late on Friday, fresh rumors started circulating in the financial markets, this time after an employee of broker Max Capital spread claims that the government would devalue by 50% when markets opened on Monday - and that this could prompt Massa’s exit. On Saturday morning, the company was quick to publish an apology, claiming that the comments did not represent its position and that the employee had acted of his own accord on the basis of false rumors.
Massa himself, a centrist career politician with a certain tendency for shifting alliances, was appointed Economy “superminister” in July. The implication was that if he could sort things out, he’d be a strong candidate for president. But not only has he failed to deliver on promises to get inflation below 3% by April: March’s inflation figure for the month alone was 7.7%, with food prices up nearly 10%.
So serious is Argentina’s inflation problem that in the second half of 2022, poverty increased even as the economy grew. Over half of Argentina’s children are living in poverty and around one in eight are in extreme poverty. For now, it looks like he’ll keep his job. But the presidency is looking distant.
So where does that leave us?
The Central Bank announced Thursday that it was increasing interest rates to 81%. Economic orthodoxy says this should calm inflation, but then economic orthodoxy has always been flummoxed by Argentina.
Further ahead, it’s looking likely that Argentina will renegotiate its deal with the IMF: the Fund had recently agreed to reduce international reserve accumulation targets - that is, the dollars Argentina has in its coffers to do business abroad, among other things - but the changes don’t go far enough, and even the revised targets look all but impossible. Despite public spending cuts, the country missed its fiscal deficit goal in the first quarter.
The idea is that a renegotiation would remove the pressure to either intensify austerity measures or simply break with the terms of the deal. In the second case, Argentina would eventually fail its quarterly evaluations by the IMF, the IMF would likely stop disbursing money, and Argentina could enter into default. In the first case, Argentines would sooner or later burn things down.
Judging from the noises coming from Washington amid a series of visits from Massa, Fernández and other officials lately, there’s reason to hope that the deal will be renegotiated: a rehash of a rehash, but probably better than the alternative.
For now, two main questions remain. The first is what will happen in October’s elections. The second is whether, in the face of climate change, war, pandemics, and innumerable other supposed “black swan” events, whoever ends up governing Argentina has any reason to expect a return to “business as usual” going forward.
The Big Headlines in Latam
Ecuadorian president Guillermo Lasso said on Wednesday that if Congress votes to impeach him over pending corruption charges, he will dissolve the government. He is currently facing accusations that he misused state funds in a probe launched by left-wing parties over his handling of state-owned petroleum transport company Flopec. If Lasso follows through on his “nuclear option”, he would rule by decree until new Parliamentary and Presidential elections could be organized— elections he has promised to run in. He denies the corruption charges, calling them “politically motivated.”
Colombian President Petro Gustavo met with US President Joe Biden at the White House this week. Both parties released positive statements after the meeting promising continued cooperation between the long-time allied countries. Petro also unveiled a plan to organize a summit with Venezuelan opposition leaders in Bogotá on April 26 with the goal of starting new dialogues between Venezuelan President Nicolas Maduro and opposition parties. In the statement he said that he hopes to help negotiate conditions under which “the Venezuelan people, free from sanctions, can choose their own government in free elections.”
Another former vice president of Venezuela’s state-owned oil company PDVSA, Ysmel Serrano, was arrested as part of an anti-corruption probe looking into wrongdoing at the state firm. Over 170 raids and 61 arrests have come out of cases involving PDVSA and other entities— the same ongoing purge that toppled Venezuela’s general attorney Tarek Saab. One of those arrested, Leoner Azuaje Urrea, was found dead in his jail cell Thursday. An autopsy showed signs of torture, and the cause of death was determined to be strangulation. Officials have claimed that he hung himself with his bedsheets.
Spanish Word of the Week:
Gadejo- A Colombian slang word that is a conjunction of “ganas de joder”
A Gadejo is someone who is on a mission to create trouble. “Ganas de joder” means, “an urge to fuck shit up”, usually in a vindictive way.
Joshua learned the word this week when someone wrote his editor an angry letter at the New Humanitarian complaining that their NGO hadn’t been mentioned in a recent piece on Chocó. Joshua reached out to the upset person, offering to give an interview, but the offer was rebuffed.
Confused, Joshua asked Daniela “Why is this guy writing an angry letter about not being interviewed, then declining the interview? This doesn’t make any sense.”
“Es por gadejo” replied Daniela. “He is just looking to cause trouble and nothing else.”
And thus, Joshua learned a new Spanish word thanks to his pirate colleague, albeit a word whose existence makes him a little sad.
That’s all for this week, folks. ¡Chau piratas!