Back In Black: The Return Of Argentina’s Black Market Exchange Rate As Capital Flight Accelerates

Forbes – Argentina’s black market exchange rate initially surged nearly 25 percent above the official rate, meaning that despite desperate currency controls set in place by Finance Minister Hernán Lacunza, less than four weeks into the job, dollars continue to flow out of the country. This capital flight, coupled with a draining of the Central Bank’s foreign reserves that has already consumed more than US$15 billion since the primaries in an attempt to protect the value of the beleaguered peso, is seriously weighing on market confidence in South America’s third-largest economy. Add absolute uncertainty over the much needed disbursement of a further US$5.4- billion tranche of the International Monetary Fund’s record bailout package, which was initially constructed to stabilize the economy in the face of an external shock, and the situation becomes even more dire for President Mauricio Macri, who is looking to the October 27 election with some level of optimism. Where it comes from isn’t entirely clear.

It’s obvious that the president’s economic philosophy is as far possible from currency controls and interventionism of financial markets as possible. Macri’s absolute liberalization of the capital markets, which many now deem extreme as it was more permissive than most OECD countries including Japan, was part of his strategy to attract foreign investment. Yet, Macri, the tamer of populism, “breaker of chains, and mother of dragons” in the market’s view at the time, has presided over an economic collapse that once again has seen Argentina default on its debt (this time peso-denominated debt, considered by many an impossibility before it happened), put limits to banking withdrawals and dividend repatriation for international corporations, freeze energy prices (directly hitting the “crown jewels” of Vaca Muerta), and generate fiscal disbursements to the population which will harm his deficit reduction crusade, among other measures.

Macri’s emergency agreement with the IMF could end up being the noose with which his presidency is finally hung. The record US$57-billion stand-by loan was an emergency facility aimed at stabilizing the economy, which in practical terms meant it should generate confidence that the Central Bank was well stocked, allow the government to cover its deficit spending, and intervene the currency markets if the peso went haywire. It was structured so that it is paid in tranches after IMF technical reviews, supposedly a measure to avoid mistakes of the past. Yet, the PASO primaries resulted in such a slap in the face for Macri by Alberto Fernández and his political godmother, Cristina Fernández de Kirchner, that the market freaked out, sending the peso-dollar exchange rate as high as 66 pesos per greenback and throwing the economy into a deadly tailspin. A very fragile pax cambiaria ensued as a dollar- tourniquet has stymied a massive move out of pesos and into dollars, generating an exchange rate premium that promises to widen, as Lacunza and Central Bank Governor Guido Sandleris try to develop additional measures to clamp down on capital flight, which necessarily generates economic disruptions and an impossibility to understand relative prices. And, as the president of a leading international bank in Argentina recently told me, “it is impossible to grow with a cepo in place.”

After losing the PASO primaries, Macri’s emergency measures appeared to violate its agreement with the Fund. Alberto Fernández, revealing his true colors, asked the IMF to withhold the upcoming disbursement as it violated the Fund’s own internal rules. Fernández, correctly in my opinion, told the Fund’s representatives they were equally responsible for Macri’s economic disaster. The market freaked out even more. All of this has called into question whether the Fund will actually transfer Argentina the US$5.4 billion it was expected to hand over in mid-September. After remaining quiet for weeks, IMF spokesman Gerry Rice and deputy managing director David Lipton received Macri and Lacunza in Washington, meaning the Board will still analyze the situation and come to a decision, which in turn means the funds wouldn’t be available until October. The real election is on October 27, which begs the question, isn’t the fund purposely extending its own bureaucratic processes to sit Alberto on the negotiating table, assuming he wins? And will he have the support of the United States and Donald Trump?

Thus, Macri’s last days in office will be marked by a constant deterioration of Argentina’s economy, which could trigger further currency controls and a deeper fall in global market confidence.

At the same time, there are questions as to whether further defaults will occur, even if selective and temporary, further hurting the country’s credit ratings and future prospects. This is a consequence of not receiving the Fund’s money, which had been budgeted, and which will cause further pain and even the potential of pushing inflation higher.


By Agustino Fontevecchia