In a bid to protect Argentina’s dollar reserves, the country’s central bank (BCRA, its acronym in Spanish) late Tuesday evening has tightened controls on buying and spending in foreign currencies. The package, set to expire next December, was designed to restrict the purchase of dollars, and limit capital outflows ahead of a new sovereign debt restructuring.
In practice, Argentines will be able to keep exchanging pesos up to the limit of $200 dollars a month – a measure that was already in place since October 2019 – but from now on there are a few more hurdles and transactions will be more heavily taxed.
Besides discouraging people and firms from hoarding dollars, a habit that is ingrained in Argentine society as a way to hedge from inflation, currently at 42% per year, and the devaluation of the peso, the financial authority has restricted the use of credit and debit cards for products or services from abroad as well as foreign exchange operations with bonuses.
Dollar denominated purchases made with credit and debit cards will be deducted from the $200 quota. It is possible to exceed that amount, but buyers will face limits to buy foreign currency from official channels for savings.
There is no limit on credit-card spending abroad. What happens is that, for instance, if you make a purchase worth $1,000, you will not be able to use your quota to buy dollars for savings for five months. However, you can continue to buy products and services with the card.
Estefanía Pozzo, financial columnist at Ámbito Financiero
Argentines who buy in dollars using cards or who purchase foreign currency for savings will also have to pay a new 35% tax on top of an existing 30% so-called “solidarity tax”. Estefanía Pozzo reported to LABS that the new levy may be later deducted from the income tax for those who pay it.
“I do not believe people will stop consuming [on cross-border e-commerce channels], they will only pay more for it”, added Fausto Spotorno, an economist at the Orlando Ferreres & Asociados consultancy, in an interview with LABS.
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Payments for digital services, such as Netflix and Spotify, are also covered by the new tax and considered within the ceiling of $200 dollars per month, as long as they are charged in dollars. Providers may bill such subscriptions in pesos to avoid the quota. “International airline tickets could also suffer a 35% hike in prices, if they are charged in the American currency”, highlighted Pozzo.
The president of the BCRA, Miguel Pesce, said that it all depends on how digital services are billed: “If the company bills in dollars, if the card bill comes to you with consumption in dollars, you pay the tax and it is included in the allowance. If the company bills in pesos, if the card arrives as consumption in pesos, it does not apply to either,” he explained on Wednesday.
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The widening gap between official and parallel rates
The administration was also seeking to reduce the gap between Argentina’s official exchange rate and that on the parallel market, but that has somewhat backfired. According to the official rate, US$1 fetches about ARS 80. The so-called “solidarity dollar”, which was already levied and directed for those who want to buy the foreign currency for savings, jumped from ARS 103 to ARS 131 because of the new tax. The unofficial “blue” dollar, bought and sold in the parallel market has climbed from ARS 130 to ARS 145.
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Julia Strada, PhD in Economic Development and a director at both Grupo Banco Provincia and the Center for Argentine Political Economy (CEPA), told LABS that there was an urgent need for the government to stop daily losing $150 million of central bank reserves.
Historically, there have always been 1 million Argentines who bought savings dollars. During the pandemic, they numbered 4 million. These people will be able to continue buying, but at a more expensive exchange rate. The question for us who focus on the economy is whether this restrictions solve the problem.
Julia Strada, PhD in Economic Development and a director of Grupo Banco Provincia and the Center for Argentine Political Economy (CEPA)
Another measure is aimed at dollar assets received from abroad, which now must be held for a minimum period of 15 working days. Its goal is to prevent too much speculative money circulating in the securities market.
“The aforementioned decisions will restrict speculative maneuvers by investment funds that are not resident in the country and their impact on the dynamics of the financial and exchange markets,” said the central bank. Dollar-denominated assets that settle in pesos will not need to comply with the holding period, though.
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The central bank is also compelling companies with over $1 million in monthly foreign debt payments from now until March to refinance at least 60% of maturities.
Argentina’s president, Alberto Fernández, defended the new rules on the grounds that they intend to discourage hoarding of foreign currency and speculation “in a country where dollars are needed to produce, not to save”. “We are building the logic of an economy that no longer promotes speculation and wants dollars to stop being a speculation tool,” he said.
The South American nation is headed for a 12% economic contraction this year, which would mark the third straight year of recession, and is just emerging from its ninth sovereign default after restructuring nearly $110 billion in foreign currency debt.
New restrictions bring to mind measures implemented by former president and current vice president Cristina Fernández de Kirchner, who also imposed hard capital controls during her second term in Casa Rosada, the presidential palace, from 2011 to 2015.
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Markets were terrified
Argentina’s standing in global markets is at risk once again. The move sparked a selloff of Argentine bonds and stocks, while the price of dollars in unofficial markets spiked, widening a large gap with the official rate – the opposite of what the government intended.
“It shows total desperation,” said Agustín Monteverde, an economist at consultancy Massot Monteverde & Asociados. “They have just hung a sign around their necks that says ‘meltdown’.”
The tightened controls underscore how Argentina’s left-leaning Peronist government is struggling to unwind interventionist policies that have long dogged the resource-rich country, despite sealing a major recent debt restructuring deal.
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The central bank now finds itself in a precarious position, with net reserves having fallen to as low as $6.8 billion including holdings of gold, according to a J.P. Morgan estimate, despite capital controls put in place last year.
This is more evidence that authorities are not willing to address the fiscal and monetary imbalances driving the capital flight and reserves drain. And they weaken growth prospects.
Barclays statement
It faces negotiations with the International Monetary Fund to delay more than $40 billion in payments due in the next few years. Investors said tighter controls could muddy those talks.
Capital controls have created a nearly 90% divergence between official and unofficial peso rates, as dollar demand has remained high.
“The government had two paths: to finally propose an economic program that would allow it to get out of capital controls and allow public accounts to be put in order, or a new very restrictive tourniquet,” concluded Spotorno, from Orlando Ferreres & Asociados. “The latter is what it has just done.”
