Thursday, September 25, 2014

Argentina running out of options

With Argentina's private sector in disarray, Cristina Fernandez de Kirchner's government has been forced to increasingly bail out failing businesses, particularly importers that are critical to Argentina's stability. The nation's fiscal problems are escalating rapidly as it undertakes what amounts to a form of nationalization.

Source: Goldman Sachs

A great deal of hard currency now goes to support domestic importers (that are forced to sell at a loss to keep prices under control) and the country is becoming desperate for dollars needed to import the products the population needs. In the past, some of the greatest sources of foreign currency for Argentina have been grain exports, particularly soy. Except now there is a problem ...

Cash soy prices (source: barchart)

With fiscal deficit growing rapidly and access to international markets shut off due to the recent default, Argentina's central bank has been doing the only thing a central bank can do in this situation - monetize the deficit by printing more pesos. This has resulted in inflation levels of over 36% this summer and probably even higher currently. Not quite Zimbabwe levels yet, but moving in that direction.

In response to such inflationary pressures and fully aware that further currency devaluation by the Fernandez regime is inevitable, businesses and households are hoarding dollars. One US dollar now trades at over 15 pesos in the unofficial ("blue") exchange market - some 80% premium to the official exchange rate.

Source: Dolar Blue

There are no easy answers at this juncture. With foreign reserves expected to dwindle and risks rising of foreign bondholders accelerating full debt repayment - which they can do now that they are no longer receiving their coupon payments - Argentina is running out of options. The authorities are becoming increasingly desperate as Fernandez, in search of someone to blame other than her own failed policies, turns on Argentina's private sector. New legislation that resembles Venezuela's heavy handed socialist style has now made strong corporate profit margins in Argentina illegal.
The Washington Post: - One of South America's largest countries has passed new measures to cap consumer prices of goods, set profit margins for private businesses and levy fines on companies found to be making "artificial or unjustified" profits.

If that sounds like something they would do in Venezuela, well, that's because they already have.

Now it's Argentina that wants to use the heavy hand of the state to grip the invisible hand of the market.
Earlier this year hopes were rising for a better future in the post-Fernandez Argentina (see post). Those hopes have now been dashed.

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