Macri plays dangerous game with Argentine peso.
Analysts abroad largely agree removing restrictions too quickly could spark trouble.
If there’s one point president-elect Mauricio Macri has been crystal clear about, it’s that he hates all the regulations throttling the country’s currency market. So on Tuesday, Macri reiterated his pledge to do away with the foreign-exchange controls immediately upon taking office next month.
It’s an audacious plan, one that could jump-start his efforts to lure much-needed investment to the country but it also comes with great risk. With the official and black-market exchange rates currently 58% apart, lifting the controls will almost certainly trigger a plunge in the value of the peso. That could cause a surge in consumer prices in a country where inflation is already running above 20% (inflation in November has already doubled to 3% a month - 40% annualized - on devaluation fears), force an economic downturn, and spark a public and political backlash against the new government.
The plan is so fraught with risk and so logistically difficult that many outside observers insist that he won’t really try to pull it off so quickly. They chalk it up to campaign rhetoric. But Macri isn’t toning down his language as president-elect. When asked Tuesday how fast he’d move, he replied: December 11 - one day after he’s sworn in.
“History is littered with the corpses of countries that have abandoned capital controls precipitously,” said Barry Eichengreen, an economics professor at the University of California at Berkeley and former senior policy adviser to the IMF during the 1997-98 Asian financial crisis. Should Macri, two-term mayor of Buenos Aires and wealthy businessman, follow through on the rhetoric, the US$600 billion economy could suffer a big blow.
Assuming he devalues the peso by 39% to 15.8 pesos in three months (a 64% jump in the value of the dollar in Argentina) and removes utility subsidies, the Central Bank will have to raise short-term interest rates to 40% by September to control inflation, according to Oxford Economics, a UK research firm. Under such a “shock therapy,” the economy will shrink by about 3% annually in the next two years before picking up in 2018, Brazilian economist Luiz Kessler wrote.
Venezuela, a Mercosur trade bloc partner and long-time ally, has been there before. In 1989, newly-elected President Carlos Andrés Pérez abruptly lifted foreign-exchange controls and let the currency plunge after finding that the Central Bank was running out of foreign reserves. Consumer prices soared 21% in one month alone, leading to the “Caracazo” riots that killed hundreds and spurred Hugo Chávez, then an Army officer, to stage a coup attempt that launched his political career.
Instead of shock and awe, Macri should adopt a gradual transition to a free-floating exchange rate, said Paulo Vieira da Cunha, a former Brazilian deputy Central Bank governor. That would give the government time to pass measures that will soak up extra pesos, implement a credible fiscal plan and draw in cash from abroad, he said.
“There is a difference between doing something gradual with credibility, and doing something haphazardly into a void,” said Cunha, now chief economist at Los Angeles-based money manager Ice Canyon.
No one is saying Macri shouldn’t start implementing changes quickly. The economy is currently growing at 2.8%. Foreign exchange reserves, however, are the lowest in nine years at US$25.8 billion. The budget deficit is the largest in three decades (6-7% of GDP). In the last four years, the peso has fallen 55%. And while wages have kept up consumer prices have more than doubled according to private estimates, with annual price increases of more than 20% since 2011.
But for Macri, the margin for error is thin. As 49% of voters went for his opponent, the Victory Front (FpV) candidate Daniel Scioli, unpopular measures of large devaluation, coupled with spending cuts and tax increases, would only alienate Argentines and erode his political support.
Mario Blejer, former Central Bank head who devalued the peso in 2002, said capital controls should only be phased out and lifted sector by sector, starting with importers. To mitigate the impact, Macri will have to increase interest rates on Central Bank notes and spur demand for pesos, said Blejer, who was forced to boost those yields to 140% thirteen years ago. “We used to think about it as an equation in which the greed for higher interest rates would trump the panic of holding pesos,” Blejer, who was most recently advising Scioli, said. “They’ll see that it’s difficult. You can’t just change everything from one day to the next.”
Ultimately, Macri’s narrow victory over Scioli may be the loudest call for a gradual approach, said Vargas. “What I’m seeing is that they’re becoming aware of the magnitude of the adjustments, maybe because of how close this race was, and that’s going to impact how aggressive they are,” Blejer said.
At: http://buenosairesherald.com/article/203790/macri-plays-dangerous-game-with-peso
___________________________________
Seems like old times...
Pictured: Dictator Roberto Viola swears in Economy Minister Lorenzo Sigaut in March 1981. Sigaut's 30% devaluation just days later touched off a chain reaction that crashed the economy. His response to soaring inflation was to raise interest rates to a depression-inducing 20% a month.
As in Macri's case, these policies were welcomed by large landowners and speculators to whom they became a veritable windfall. Amid the worst recession since 1930 they were rescinded 15 months later, and the dictatorship stepped down the following year.
= new reply since forum marked as read
Of course, we wouldn't even be having this conversation if Singer the laundry vulture weren't being used to block Argentina's access to international bond markets. We know there's interest in Argentine bonds because, as Porzecanski has noted, most of them now trade at par value (100 cents on the dollar or higher). Bondholders are simply limited in the quantities they can purchase by the risk of having their money illegally absconded by Singer and his paid monkey, Judge Greasa.
My hope is that at least Washington may call Singer - and Greasa - off in order to "reward" Macri. Of course though, there's really nothing he or any Argentine president can do for U.S. interests abroad - other than flattery, which of course is meaningless. The many U.S. firms that do business in Argentina (whose profits are estimated at US$8 billion a year) will, on the other hand, certainly be hurt by Macri's plans.
Some flattery. 
