Versión Español
EspañolBy Carlos Alberto Salguero
Argentineans face growing uncertainty about the US dollar exchange rate as election day approaches. The Central Bank has depleted its reserves, which suggests that the Argentinean currency could suffer a strong devaluation. The new administration will then be forced to face the music and admit that, unavoidably, the foreign-exchange controls have to go.
Exchange rates fluctuate all the time, because the scenarios that give rise to those fluctuations also change incessantly. Every incident has an impact, but we should focus on big events.
Experience tells us that prices change every day, and one would expect that people take that phenomenon into account. But a contradictory notion of price rigidity has given rise to common misconceptions about production, consumption, and trade.
Today, many who have suffered the consequences of price oscillations object to free-market price mechanisms and proclaim that “naturally stable” prices are fairer. It’s easy to understand why.
But price controls, euphemistically called “protected prices” in Argentina, are already in place and have left many troubled companies without liquidity and, in certain cases, bankrupt.
As economist Ludwig von Mises stated, refuting the notion that price controls are beneficial is important not only to the economy but to political decision-making. The disastrous measures in political economy that prevail today are, in large part, due to the failure to address that mistake.
In Argentina, the free rate came to an end in November 2011, when President Cristina Kirchner enacted the foreign-exchange controls to allegedly prevent a devaluation that would impoverish Argentineans.
The national government literally fixed a maximum price in the foreign-exchange market and began forbidding any transactions not carried out according to the official price. If it had established a maximum price equal or similar to the market’s equilibrium price, the economic effects would have been limited to the system’s administrative costs.
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But when the state tries to give the national currency a value that is superior to its market value, Gresham’s law comes into effect. Scarcity of foreign currency necessarily occurs, because the demand for dollars exceeds supply at the official price, which is fixed arbitrarily.
On November 13, the official exchange rate stood at AR$9.59 for every US dollar, which was 2 percent lower than real value in 2001. It did not reflect an equilibrium, not even in the short term.
The Central Bank’s international reserves decreased from a record-high US$52.6 billion in 2011 to the current sum of US$26.3 billion — a 50 percent plunge.
Now, if the actual level of foreign-exchange reserves are compared to the monetary base or high-powered money, which on October 30 amounted to AR$543 billion, according to the Central Bank, one finds a debt service coverage ratio that sets a rate of AR$20.63 per dollar.
Without dwelling on the legitimacy of the assets registered on the Central Bank’s balance sheet, one does find US$11.8 billion in swaps (Chinese yuan), US$8 billion in unpaid imports with commercial debt delays, and unauthorized dividends payments made abroad during the last four years. All of which adds problems to the Central Bank and its debt service coverage ratio.
Between both extremes there appear black-market dollars — also called blue, parallel, marginal, or illegal dollars — which are no more than the natural response to official controls. Beyond the derogatory names which the government assigns to black-market dollars, their circulation simply reflect Argentineans’ real need to operate under free-market conditions. To this one might add an additional risk premium that applies to informal transactions. All in all, the total amounts to AR$15.27 per US dollar.
It’s a fact that a significant portion of the sum assigned to savings, US$1.2 billion sold to individuals since October at a rate of AR$11.50 per dollar (AR$9.59 plus an additional 20 percent), were immediately converted to pesos since they came to the front of the line in the informal market. There, they were sold at AR$14.90 per dollar, a trick yielding an immediate gain of 29.47 percent.
The government’s maneuver to contain marginal parity below its debt service coverage ratio is onerous at best. Presumably, this explains the sale of 12 million futures contracts, each valued at US$1,000, in an act which ought to have legal consequences.
On the other hand, assigning a dollar value of AR$14.46, taking liquidation into account, is a means to legally acquire dollars abroad or to buy Argentinean pesos from another country. Shares or government bonds in the Argentinean market are bought from abroad. Thereafter, the bond is sold abroad at its Argentinean peso value, and the buyer deposits the determined amount in a foreign bank account.
At the same time, this allows dollars to enter Argentina. When there are more people wanting to leave than those wanting to enter the country, the price of the dollar, taking liquidation into account, naturally increases. But if the opposite is the case, dollars decrease in price. In this case, the Central Bank’s reserves are not affected, since transactions are carried out among individuals. Margins, however, are smaller in spite of brokerage fees.
With its inflationary measures, the government has clearly reduced the Argentinean peso’s purchasing power compared to the dollar. It has also affected goods and services in general. Its intentions are finally exposed by its decision not to interfere in foreign exchanges in order to end the dollar scarcity. In that way, whoever wants to buy foreign currency can do so under market conditions.
Carlos Alberto Salguero is a professor at the University of La Plata, in Argentina. He holds a PhD in economics and a master’s degree in business administration from ESEADE, Buenos Aires.
