A year ago the administration of President Cristina Fernandez imposed the first of a long chain of foreign money exchange restrictions that have caused a serious impact on the economy, the private sector and other provincial and city governments.
The so called ‘dollar-clamp’ was stared 28 October 2011 with the purpose of controlling the sale of US dollars in the domestic money market and to prevent the growing outflow of capital triggered by the Argentine government unorthodox policies.
The government is also trying to put an end to the long established Argentines’ caution of holding their savings in foreign currency, be it dollars, Euros or metal.
Making it illegal to purchase dollars with the purpose of savings, has also had a terrible impact on the real estate and housing market, which is virtually paralyzed unable to have access to the US dollars which is the money of exchange in this industry.
Although the global crisis is far serious than yet imagined by South American countries which live off commodities exports be it the case of Argentina, Uruguay and even Brazil, these restrictions with the purpose of ensuring a trade surplus and thus limiting the sale of dollars for imports has caused serious bottlenecks in different sectors of the economy, further helping to the slowdown.
While last year the Argentina economy according to official stats expanded at an annual rate of 8.9%, in the second quarter of this year it was almost zero.
“The lack of transparency in the money exchange market is the most feared enemy of investment. In this scenario of uncertainty, the private sector invests insufficiently and this affects the production capacity, and jobs”, warned a recent report from consultants Economia&Regiones.
Dollars can still be purchased in special cases and with a long bureaucratic peregrination: such is the case for tourists travelling overseas, private corporations and city and provincial governments that have issued bonds in foreign currency ruled by overseas courts, and importers.
But the outcome is not always favourable nor arrives on time.
The northern province of Chaco caused an upheaval in the bonds market when unable to obtain dollars it was forced to pay capital and interest in Argentine Pesos. Another province Formosa seems to be on the same path but with a more friendly approach, discussing terms with creditors.
There are also court cases of private companies faced with the same challenge that have paid suppliers and creditors with Pesos instead of dollars.
Obviously this had an immediate reaction in the bonds market and it was pointed out by the risk rating agency Moody’s which underlined the growing concern because the private sector and non central governments are limited in the effective access to US dollars, and on time for honouring contracts.
“It is becoming growingly evident that external financing for Argentine corporations will be out of their reach for quite some time. It is very complicated for local companies to convince foreign investors that putting fresh dollars in Argentina is a good business”, said Anlytica a private consultant.
However foreign exchange restrictions did manage to drastically slow down the outflow of capital last year, which was an estimated 21.5 billion dollars, double the 2010 figure.
So far this year and according to the Argentine central bank the outflow of capital is down to 3.5 billion, or 67% less than in 2011.
The foreign currency access restriction which has also had a huge impact for importers has helped Argentina in nine months build a trade surplus sufficiently large to pay for the energy bill, another shortcoming of the Cristina Fernandez administration, and one of the arguments for the nationalization, earlier this year, of YPF, belonging to Spain’s Repsol.
By keeping the price of public utilities rates low or frozen, as with fuels, investment in the sector has fallen drastically and last year Argentina had to import almost 10 billion dollars in natural gas and other fuels.
In a recent speech before the Chamber of Commerce the Argentine president argued that “we need the dollars so our entrepreneurs can purchase and import the basic inputs to keep producing”, and discarded the existence of a ‘dollar-clamp’.
“We keep selling millions of dollars in the formal market” she said supported by some numbers: “in the official dollar market trading totalled 84.76bn dollars of which, 51.7bn for imports; 11.1bn to pay debts by the private sector and 5.9bn to tourists travelling overseas”.