Gauthier
01-16-2014, 07:16 AM
Soaring Inflation, Falling Reserves Raise Worries About Government's Management of Economy
The Wall Street Journal
By
Ken Parks
Jan. 15, 2014 2:25 p.m. ET
BUENOS AIRES—The Argentine currency tumbled to record lows against the U.S. dollar on Wednesday as falling international reserves and rising inflation eroded the public's faith in the ability of the government to manage the economy.
In a nod to inflation-weary voters, President Cristina Kirchner replaced her economy minister, central bank chief and price-control enforcer shortly after her ruling coalition's support plunged in October's midterm congressional elections. Many economists say that annual inflation is now above 25%, compared with just 10.9% reported by the government at the end of December.
But the honeymoon for Mrs. Kirchner's new economic team appears to be over as some Argentines and investors begin to lose patience with an administration whose loose fiscal and monetary policies have spawned the second highest rate of inflation in the Americas, behind Venezuela.
For more than two years, the president has imposed currency rationing on Argentines to prevent a full-blown run on the central bank's foreign currency stocks by residents seeking the safe haven of the dollar. Those controls have fueled a vibrant underground currency market where the greenback sells for a steep premium over the official exchange rate.
Late Wednesday, the peso traded around 11.20 to the dollar, compared with a previous record low of 10.93 pesos, according to newspapers that publish black market rates. Meanwhile, the peso weakened on the regulated wholesale market to almost 6.76 pesos to the dollar.
Argentines follow the black market exchange rate, locally known as the "dólar blue," much like Americans watch gasoline prices. The bigger the gap between the black market and regulated rates, the more the public fears a violent devaluation of the peso.
The peso's slide this year has widened that gap to about 64%, from between 50% and 55% in December. That's still a far cry from inflation ravaged Venezuela, where the breach between official and black market rates exceeds 900%.
"If they don't ease up on the [currency restrictions], the gap will persist. But they don't have the dollars to lift the restrictions," said Francisco Diaz, a currency trader at ABC Mercado de Cambios.
Dollar demand typically rises during the Southern hemisphere summer months, when Argentines planning to travel abroad turn to underground currency dealers to supplement their government allotment.
But the peso's 9% slump on the black market this year likely signals that Argentines have far greater worries than getting dollars to spend in Uruguayan beach resorts.
On Tuesday, opposition lawmakers published a report that put inflation at 28% in 2013. That same day, the central bank said the currency reserves that Argentina uses to pay its creditors and buy critical imports like natural gas fell to a seven-year low of $30 billion.
The underground currency market is "marginal" in scope and doesn't reflect the performance of the broader economy, Jorge Capitanich, Mrs. Kirchner's cabinet chief, told reporters last week when the black market peso hit its previous record low.
"The problem isn't only that there are two exchange rates; rather, the breach between the two has been so big for so long. Economic agents start to set prices, especially on services, based on the parallel exchange rate," said Dante Sica, director of Buenos Aires-based economic consultancy Abeceb.
A weaker peso stokes inflation and reduces Argentines' purchasing power by increasing the price of imported goods.
For years, a steady peso was one of the few anchors to inflationary pressures in the economy. But starting in the second half of 2013, the authorities accelerated the depreciation of the official exchange rate to close the gap with the black market.
The peso weakened 25% last year to 6.52 to the dollar at the end of 2013. The local Rofex futures market has the official exchange rate at 9.15 this October.
The government's habit of borrowing money from the central bank to cover deficits is a major contributor to inflation.
Mr. Sica said the ratio of reserves to the money supply is a good indicator of depreciation expectations.
In December, there were about 14 pesos in the hands of the public and checking accounts for every dollar in reserves, compared with eight pesos a year earlier, according to central-bank data.
"Until there is a recovery in reserves or a drop in the amount of money in the economy, it's hard to believe there is going to be a significant drop in the [black market] exchange rate," said Mr. Sica, who was Industry and Commerce Secretary under former President Eduardo Duhalde.
Mrs. Kirchner and her ministers have repeatedly ruled out austerity measures like cutting spending, saying those policies would only hurt the economy. The administration has instead offered soft credit to stimulate manufacturing output and launched a new round of price controls on goods ranging from milk to condoms.
http://online.wsj.com/news/articles/SB10001424052702304603704579322750262415232?mg=ren o64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB1000 1424052702304603704579322750262415232.html
The Wall Street Journal
By
Ken Parks
Jan. 15, 2014 2:25 p.m. ET
BUENOS AIRES—The Argentine currency tumbled to record lows against the U.S. dollar on Wednesday as falling international reserves and rising inflation eroded the public's faith in the ability of the government to manage the economy.
In a nod to inflation-weary voters, President Cristina Kirchner replaced her economy minister, central bank chief and price-control enforcer shortly after her ruling coalition's support plunged in October's midterm congressional elections. Many economists say that annual inflation is now above 25%, compared with just 10.9% reported by the government at the end of December.
But the honeymoon for Mrs. Kirchner's new economic team appears to be over as some Argentines and investors begin to lose patience with an administration whose loose fiscal and monetary policies have spawned the second highest rate of inflation in the Americas, behind Venezuela.
For more than two years, the president has imposed currency rationing on Argentines to prevent a full-blown run on the central bank's foreign currency stocks by residents seeking the safe haven of the dollar. Those controls have fueled a vibrant underground currency market where the greenback sells for a steep premium over the official exchange rate.
Late Wednesday, the peso traded around 11.20 to the dollar, compared with a previous record low of 10.93 pesos, according to newspapers that publish black market rates. Meanwhile, the peso weakened on the regulated wholesale market to almost 6.76 pesos to the dollar.
Argentines follow the black market exchange rate, locally known as the "dólar blue," much like Americans watch gasoline prices. The bigger the gap between the black market and regulated rates, the more the public fears a violent devaluation of the peso.
The peso's slide this year has widened that gap to about 64%, from between 50% and 55% in December. That's still a far cry from inflation ravaged Venezuela, where the breach between official and black market rates exceeds 900%.
"If they don't ease up on the [currency restrictions], the gap will persist. But they don't have the dollars to lift the restrictions," said Francisco Diaz, a currency trader at ABC Mercado de Cambios.
Dollar demand typically rises during the Southern hemisphere summer months, when Argentines planning to travel abroad turn to underground currency dealers to supplement their government allotment.
But the peso's 9% slump on the black market this year likely signals that Argentines have far greater worries than getting dollars to spend in Uruguayan beach resorts.
On Tuesday, opposition lawmakers published a report that put inflation at 28% in 2013. That same day, the central bank said the currency reserves that Argentina uses to pay its creditors and buy critical imports like natural gas fell to a seven-year low of $30 billion.
The underground currency market is "marginal" in scope and doesn't reflect the performance of the broader economy, Jorge Capitanich, Mrs. Kirchner's cabinet chief, told reporters last week when the black market peso hit its previous record low.
"The problem isn't only that there are two exchange rates; rather, the breach between the two has been so big for so long. Economic agents start to set prices, especially on services, based on the parallel exchange rate," said Dante Sica, director of Buenos Aires-based economic consultancy Abeceb.
A weaker peso stokes inflation and reduces Argentines' purchasing power by increasing the price of imported goods.
For years, a steady peso was one of the few anchors to inflationary pressures in the economy. But starting in the second half of 2013, the authorities accelerated the depreciation of the official exchange rate to close the gap with the black market.
The peso weakened 25% last year to 6.52 to the dollar at the end of 2013. The local Rofex futures market has the official exchange rate at 9.15 this October.
The government's habit of borrowing money from the central bank to cover deficits is a major contributor to inflation.
Mr. Sica said the ratio of reserves to the money supply is a good indicator of depreciation expectations.
In December, there were about 14 pesos in the hands of the public and checking accounts for every dollar in reserves, compared with eight pesos a year earlier, according to central-bank data.
"Until there is a recovery in reserves or a drop in the amount of money in the economy, it's hard to believe there is going to be a significant drop in the [black market] exchange rate," said Mr. Sica, who was Industry and Commerce Secretary under former President Eduardo Duhalde.
Mrs. Kirchner and her ministers have repeatedly ruled out austerity measures like cutting spending, saying those policies would only hurt the economy. The administration has instead offered soft credit to stimulate manufacturing output and launched a new round of price controls on goods ranging from milk to condoms.
http://online.wsj.com/news/articles/SB10001424052702304603704579322750262415232?mg=ren o64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB1000 1424052702304603704579322750262415232.html