1. ARGENTINA BLASTS ‘SPECULATIVE ATTACKS’ (The Wall Street Journal)
By Ken Parks
29 January 2014
Government Says Businesses, Media Coordinating to Buy Assets Cheaply, as It Tries to Stabilize Peso
BUENOS AIRES — Argentina’s government accused businesses of orchestrating speculative attacks against emerging-market currencies including the Argentine peso, as it injected more U.S. dollars into the economy on Tuesday to try to calm nerves after last week’s devaluation.
Christina Kirchner’s cabinet chief, Jorge Capitanich, said big business and media groups frequently work together to undermine developing countries.
“The modus operandi of these speculative attacks is on all fronts with a single objective: to buy depreciated financial and hard assets,” Mr. Capitanich said. “Our message is: ‘Argentines, let’s not be naive.’ We have seen this movie repeatedly throughout our history.”
Mrs. Kirchner, attending a regional summit in Cuba, blamed Argentina’s currency woes on banks, exporters and businesses. “It looks like there are some people who want us to eat soup again, but this time with a fork,” the president posted on her Twitter account, using an expression meant to convey a swindle.
Argentina’s central bank spent about $115 million on Tuesday in a successful effort to keep the peso exchange rate steady at about 8 to the U.S. dollar, said a person close to the foreign-exchange market. During each of the past few trading sessions, the central bank has spent similar amounts to defend the currency from a more abrupt drop.
Other central banks in developing markets that have recently seen turmoil, such as Turkey and India, also intervened in their financial markets on Tuesday. Investors have worried over signs the U.S. Federal Reserve will tighten its monetary policy and over China’s slowing growth.
But in Argentina, many economists say the economy has been hurt by the high public spending, which has led to high inflation, an overvalued currency and a weakening trade surplus that threatens the government’s dwindling supply of hard currency.
After speeding up the depreciation of the peso against the dollar last year, the Kirchner administration allowed the currency to weaken 15% last week. It was the peso’s biggest drop in more than a decade and unnerved many Argentines who remember the abrupt devaluation in 2002 that came weeks after the country defaulted on $100 billion in debt.
On the black market, the peso weakened slightly to 12.30 per dollar, according to newspaper El Cronista, which tracks black-market rates, suggesting many Argentines still view the official rate as too strong.
Tuesday marks the second day of new rules that allow some Argentines to buy up to $2,000 a month for savings purposes as the Kirchner administration tries to take business away from a black market that is adding to double-digit inflation.
The government hopes that by injecting more dollars into the economy it can reduce the gap between the official and black-market exchange rates. However, banks were still struggling to adapt to the new currency system Tuesday, with most authorized buyers still unable to get their dollars. Some 184,000 people had requested permission to buy $90.2 million. But only $12.8 million had been paid as of Tuesday, the government said.
The measure — aimed at building confidence among ordinary Argentines to prevent a run on banks — could prove unsustainable as it might cost up to $757 million of reserves a month, or $9.1 billion a year, at the current exchange rate, according to estimates by Credit Suisse.
“We would not be surprised to see the limits amended, unless sales are lower than expected or the nominal exchange rate is devalued sharply again,” Credit Suisse economist Casey Reckman said in a note.
The new measure will likely continue to be a drain on Argentina’s diminishing foreign-currency reserves, which dropped to $28.7 billion on Tuesday.
2. BRAZIL’S ROUSSEFF SAYS COUNTRY WON’T OFFER HELP TO ARGENTINA (The Wall Street Journal Online)
By Paulo Trevisani
28 January 2014
Brazil Won’t Offer Help to Neighbor Because ‘It Wasn’t Asked’
BRASILIA—Brazil’s President Dilma Rousseff said Tuesday her country isn’t offering help to neighboring Argentina, which is going through an economic rough patch.
“We won’t offer any help for a very simple reason: it wasn’t asked,” she told reporters in Cuba, according to transcripts of the interview made available by her office. “President Cristina thinks she can deal with that situation,” she said, referring to Argentina’s President Cristina Kirchner.
Both women were attending to a summit of an organization of Latin American and Caribbean nations in Cuba.
Argentina has seen its currency depreciate about 15% last week to 8 Argentine pesos per U.S. dollar. It was the peso’s biggest drop in more than a decade and unnerved many Argentines who remember the violent devaluation in January 2002 that came just weeks after the country defaulted on about $100 billion in debt.
Argentina is the largest market for Brazilian exports in South America and many analysts fear that its economic problems could further slowdown Brazil, where output is already showing subpar growth.
“They have a large crop and will start to sell it,” Ms. Rousseff said of the Argentines. “I believe they will have the conditions to overcome this, at least I hope it will happen,” she said.
3. ARGENTINA SPENDS $115 MILLION TO STEADY PESO (The Wall Street Journal Online)
By Ken Parks
28 January 2014
Currency Closes Unchanged at 1.08 to the Dollar
BUENOS AIRES—Argentina’s central bank spent about $115 million on Tuesday to keep the peso steady against the U.S. dollar, said a person familiar with the matter, a day after the Kirchner administration loosened currency-purchase rules in hopes of cooling black-market dollar demand.
The peso closed unchanged at 8.01 per dollar on the regulated MAE wholesale currency market Tuesday after the central bank let the currency slide 15% last week in Argentina’s biggest currency devaluation since the 2002 crisis.
On the black market, the peso weakened to 12.30 per dollar, from 12.25 on Monday, according to newspaper El Cronista, which tracks black-market rates.
Tuesday marks the second day of new rules that allow some Argentines to buy as much as $2,000 a month for savings purposes as the Kirchner administration tries to take business away from a black market that is adding to double-digit inflation and fueling expectations of further weakness in the peso.
Before Monday, individual Argentines were only allowed to buy small amounts of dollars for overseas trips, which sent some people to underground currency dealers to get dollars for travel or to protect their savings from inflation that is widely believed to be running at more than 25% a year.
Now, the government hopes that by injecting more dollars into the economy it can reduce the still wide gap between the official and black-market exchange rates. However, banks were still struggling to adapt to the new currency system Tuesday, with some authorized buyers unable to get their dollars.
The new measure, coupled with the central bank’s ongoing defense of the peso, will likely continue to be a drain on Argentina’s diminishing foreign-currency reserves, which dropped to $28.9 billion on Monday. The unrelenting decline in reserves has some economists wondering if Argentina might struggle to pay its foreign-currency debts and buy enough imports to keep its economy growing.
4. ARGENTINA ON THE BRINK (The New York Times)
By The Editorial Board
Jan. 28, 2014
More than a decade after it defaulted on its foreign debts, Argentina is again facing a financial crisis caused largely by misguided government policies. The administration of President Cristina Fernández de Kirchner recently devalued the peso and relaxed some capital controls in an effort to preserve the country’s dwindling foreign reserves. The government is hoping that these steps will ease some of the pressure on the currency, which does not float freely against the dollar. But Argentina needs to do a lot more to address inflation and other underlying economic problems that have led investors and ordinary citizens to bet against the peso.
In the years after its painful default in 2002, which wiped out the savings of millions of people, Argentina enjoyed a fast growing economy thanks in part to the booming world demand for soybeans and other commodities the country exports. But Mrs. Kirchner squandered the recovery in recent years by increasing spending on wasteful subsidies and financing the government partly by printing pesos. As a result, inflation has shot up; independent economists estimate that consumer prices jumped 28 percent last year.
Mrs. Kirchner has also hurt the economy by picking fights with private businesses and investors. In recent years, she nationalized an oil company, an airline and pension funds. In 2011, Argentina implemented controls on how many pesos its citizens could convert into dollars, which helped create a black market for currency transactions and undermined confidence in the government’s economic policies. A recent poll showed that three-quarters of the country said the economy was headed in the wrong direction.
Government officials have begun taking some steps to correct past mistakes. The economy minister, Axel Kicillof, has been negotiating compensation for the oil company, YPF, that the government seized in 2012. And Argentina will put out a new inflation index next month to convince the International Monetary Fund to accept its official data again. While those are good first steps, Mrs. Kirchner and her aides will have to take much bolder steps to repair the damage that they have done to the economy in recent years.
5. ARGENTINA’S LYING PRICES SHOW CAPITAL CONTROL LIMITS: CURRENCIES (Bloomberg.com)
By Ian Katz, Katia Porzecanski, Andrea Wong and Ye Xie
Jan 28, 2014
When Argentina decided last week to ease limits on dollar purchases, it became the latest emerging-market nation to acknowledge that capital controls usually fail in masking an economy’s flaws.
Argentina allowed the peso to plunge 15 percent after the central bank began scaling back interventions in the foreign-exchange market on Jan. 22, spurring price increases of as much as 30 percent on consumer goods as international reserves fell to a seven-year low. The black-market price in Argentina rose last week to a record 12.75 pesos per dollar, compared with the official rate of about 8, according to Buenos Aires newspaper Ambito.
“Capital controls signal that a country is very worried about preserving its foreign exchange,” Steve Hanke, a professor of applied economics at Baltimore-based Johns Hopkins University and an adviser to the Argentine government in the 1990s, said in an interview. “That means bad things are in the wind.” The restrictions spawn illegal traffic in the local currency that creates “lying prices” in the economy, he said.
Restrictions on capital flows, ranging from Argentina’s tax on vacations abroad to Malaysia’s stabilizing the ringgit after the 1997 Asian crisis, have had mixed results in boosting investor confidence in a country’s economy. Capital outflow restrictions can be effective “if they are sufficiently comprehensive to slow a sudden ‘rush to the exit,’” according to a report by four International Monetary Fund researchers released this month.
“For the average country, a tightening of outflow restrictions is ineffective as net outflows increase as a result of it,” wrote Christian Saborowski, Sarah Sanya, Hans Weisfeld and Juan Yepez, authors of the IMF report.
In Turkey, pressure is building on central bank Governor Erdem Basci to raise interest rates or face the prospect of the lira plunging to fresh records and government bonds extending declines. The scheduling of an extraordinary meeting with a midnight statement tonight may signal policy makers are planning to implement capital controls, said George Magnus, an independent senior economic adviser to UBS AG.
“The odd time does suggest, to me, something that’s going to be much more market-sensitive in that it will affect the operation of markets, not just the cost of funding,” Magnus said by phone from London yesterday.
Yesterday’s announcement came after the Turkish lira fell to records against the euro and dollar. The lira dropped to 2.3900 per dollar before reversing its losses and breaking a 10-day slump. It reached a low of 3.2726 per euro and then rebounded. Turkey’s currency was 1.1 percent higher at 2.2590 to the dollar and up 1.2 percent at 3.0856 per euro as of 12:08 p.m. in New York today.
In Venezuela, a decade of currency controls is fueling the world’s fastest inflation among the 114 economies tracked by Bloomberg and shortages of basic goods.
The official rate of 6.3 bolivars per dollar compares with the 75-bolivar rate on the black market. Official dollars therefore are the most profitable assets in the country, allowing people who have access to them enjoy a lifestyle far beyond the reach of an average Venezuelan.
“Capital controls to avoid excessive inflows have had limited success,” Ricardo Hausmann, a former planning minister in Venezuela who now teaches economics at Harvard University, in Cambridge, Massachusetts, said in an e-mail. “Capital controls to prevent outflows often postpone and amplify rather than moderate the need for adjustment. If they involve an emergence of a black or parallel foreign-exchange market, they lead to a dangerous macro and micro disaster.”
The IMF, influenced by then-U.S. Treasury Secretary Robert Rubin and his deputy Lawrence Summers, started to push Asian countries to open their financial markets and lift capital controls in the early 1990s. When the financial crisis started in late 1997, the IMF advised the region to cut budgets and raise interest rates to limit the currency depreciation.
Nobel laureate Joseph Stiglitz, then chief economist at the World Bank, opposed the IMF’s remedies, pushing for capital controls to stem the crisis, advice no Asian countries except Malaysia took.
Malaysia, faced with global investors selling the nation’s assets to bet on a depreciation in the ringgit, imposed restrictions in September 1998. These included making investors hold the ringgit proceeds of share sales for at least a year and banning the transfer of the local currency between offshore accounts.
The ringgit’s real effective exchange rate stabilized the next year, after tumbling almost 20 percent, while the nation’s foreign-exchange reserves gained following the biggest annual decline on record.
“The restrictions provided room for the authorities to accumulate reserves amid a stable exchange rate and enact policies aimed at revitalizing the economy, such as reducing interest rates,” the Washington-based IMF researchers wrote in the report that examined capital outflow restrictions in 37 emerging markets from 1995-2010.
In Iceland, the krona exchange rate stabilized shortly after restrictions were imposed during the depths of the global financial crisis in November 2008. That gave officials room to ease monetary policy to help revive the economy, according to the report.
The IMF report concludes that capital controls can be successful if “supported by either strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive.”
Since her re-election in 2011 when capital flight almost doubled to $21.5 billion, Argentine President Cristina Fernandez de Kirchner has made several attempts to keep money in the country. She implemented more than 30 measures, including blocking most purchases of foreign currencies, taxing online purchases, banning units of foreign companies from remitting dividends and restricting imports.
With annual inflation of more than 28 percent, Fernandez’s controls have failed to stem the outflow of money through the nation’s widening tourism deficit, deepening a plunge in reserves from debt payments and growing energy imports.
The controls cut the total amount traded last year in the local foreign-exchange market in half compared with 2010, according to data compiled by Argentina’s Mercado Abierto Electronico automated trading system. Still, the robust black market for dollars shows that some Argentines are finding ways around the controls.
Argentine Economy Minister Axel Kicillof said Jan. 26 the peso has reached an “acceptable level” of about 8 per dollar, a signal the central bank may continue to spend reserves to keep the rate in check. The bank sold $380 million in the official currency market to defend the price of the peso, dropping reserves to $29.1 billion.
The government also reduced some currency controls in place since July 2012, authorizing foreign-exchange purchases for people earning a monthly wage of at least 7,200 pesos ($901). Those who qualify, less than 20 percent of the population, can buy as much as 20 percent of their average monthly salary, up to $2,000 a month.
“The problem I see in the longer run for the capital control for outflows is that it interferes with foreign direct investments, because FDI wants to take money out of the country,” Guillermo Calvo, an economist at New York-based Columbia University who was chief economist at the Inter-American Development Bank for five years until 2006, said in a phone interview from New York. “If a country develops that reputation, it can be very negative for FDI. That’s very dangerous.”
6. ELLIOTT REJECTS GRAMERCY’S ARGENTINA PROPOSAL AS A ‘STUNT’ (Bloomberg News)
By Katia Porzecanski
January 28, 2014
Billionaire Paul Singer’s hedge fund Elliott Management Corp. said efforts by holders of Argentina’s restructured debt to resolve a legal dispute over bonds from the nation’s 2001 default are “bizarre.”
Elliott, which has sued for full repayment on defaulted bonds in U.S. courts, will only negotiate a settlement with Argentina directly, the fund said in a letter to investors obtained by Bloomberg News. A proposal by hedge fund Gramercy Funds Management LLC called for holders of restructured debt to cede a portion of their interest payments to holdouts.
“We find this idea beyond bizarre and entirely impracticable,” Elliott wrote. “It is a stunt.”
A U.S. appeals court ruling in August blocked Argentina from making payments to restructured bondholders without settling in full a $1.5 billion claim from holdouts. Argentine President Cristina Fernandez de Kirchner has said she won’t pay holders of defaulted bonds who rejected the terms of the nation’s two debt restructurings, which imposed losses of 70 percent, any more than what other investors accepted.
Steve Bruce, a spokesman for Gramercy, declined to comment.
Concern Argentina will default on its restructured debt as a result of the litigation has helped to push the nation’s credit-default swap prices to 2,665 basis points, according to prices compiled by CMA, the highest in the world. The decision won’t be enforced until the U.S. Supreme Court decides whether to hear an appeal by Argentina. The country has until February to submit its argument for an appeal.
Changing the terms of the restructured notes to earmark interest payments to the holdouts would require approval from holders of 75 percent of each series of bonds. The Gramercy-led group owns more than $7 billion of the nation’s restructured bonds, or almost 30 percent, according to the group’s legal adviser, Linklaters LLP.
“The only way this dispute can be resolved is for Argentina to negotiate in good faith with holders of its defaulted bonds,” Elliott wrote. “If the Argentine government simply and at long last did what every other sovereign in need of restructuring has done and actually talked to its creditors, we are confident that this long-running saga could be resolved quickly and thoughtfully.”
7. WARY ARGENTINES SHUN OFFER TO BUY DOLLARS WITH STRINGS ATTACHED (Business Week)
By Raymond Colitt and Camila Russo
January 28, 2014
Few Argentine savers are taking advantage of the opportunity to buy dollars from the government for the first time in 18 months following the peso devaluation and easing of currency restrictions in the past week.
“I’m not interested. Between the red tape and the taxes I’m better off buying it in the street,” said Alfonso Iturriaga, a 63-year-old businessman. “It seems more like a measure to reassure people.”
With near 30 percent inflation eroding purchasing power, many Argentines are unable or unwilling to swap their pesos for greenbacks from central bank reserves that tumbled 32 percent to a seven-year low over the past 12 months. The lack of appetite reflects distrust in government policies by buyers, said Juan Curutchet, vice president of Banco de la Ciudad de Buenos Aires. Many remember when bank accounts were frozen in the wake of the nation’s $95 billion default in 2001.
President Cristina Fernandez de Kirchner on Jan. 27 eased restrictions on dollar purchases following last week’s 15 percent devaluation. Since then, banks sold $12.8 million to savers, according to the national tax agency known as Afip. That compares with $188 million the central bank sold on the official currency market yesterday.
Argentines must earn at least 7,200 pesos ($899) a month to be able to buy as much as $2,000 dollars at the official rate, which yesterday closed at 8 pesos per dollar. About 80 percent of the country’s 14.8 million workers earned less than 7,000 pesos in the third quarter of last year, according to the national statistics agency’s website. Those who qualify must obtain authorization from Afip.
Argentines have an estimated $160 billion of undeclared assets stashed in mattresses or deposited abroad.
Some, like Iturriaga, fear increased government meddling, while others have nothing to invest after struggling to make ends meet on what they earn.
“I’d love to save in either pesos or dollars, the problem is I have nothing left at the end of the month,” said Raul Francesci, a 43-year-old shop attendant. “Things are so expensive I’d like to know how some people are able to save.’
Prior to these measures, Argentines were only allowed to buy a limited amount of currency for travel abroad and in some exceptional circumstances.
Along a 200-yard stretch on Florida, a popular shopping strip in downtown Buenos Aires, two dozen informal currency traders hustled passersby shouting ‘‘cambio: dollar, euro, real.”
Demand for dollars on the black market rose after the rate fell from a record 13.05 last week to 12.5 yesterday, said John Garcia, who works in the doorway of a bookstore as an informal currency trader with a hip-pouch bulging with cash.
At night the 22-year-old works as a chef’s assistant.
“People expect the peso to slump again so they’re back to buying dollars,” said Garcia as he toyed with a calculator.
The traders are locally known as arbolitos, Spanish for little trees, because they line the streets and sidewalks of the city center.
Cesar Espinoza, a 30-year-old chauffeur, who swaps currencies in the shade of a newspaper stand on Florida in his free time says only tourists are selling dollars. “Argentines won’t dream of getting rid of them — they don’t trust the government.”
Curutchet said he doesn’t expect high demand for government-supplied dollars targeted at savers.
“It would surprise me to see a flood of requests to buy dollars,” Curutchet said in a telephone interview from Buenos Aires.
Dollar purchases will be slapped with a 20 percent tax, taking the effective rate to 9.6 pesos per dollar yesterday, unless they deposit them in a bank account for at least one year.
Miriam Espotron, a customer service manager at a Banco de Galicia y Buenos Aires SA branch said yesterday several customers had inquired about the dollar purchase program but no transactions were completed.
“People are evaluating — not everybody has cash available in their account to buy dollars,” Espotron said.
If the latest measures fail to shore up confidence in the peso, Argentina’s international reserves could extend their decline, Santiago Cuneo, an economist at SW Asset Management, said in a telephone interview from Buenos Aires.
“They’ll have to devalue the peso even more and that means higher prices,” Cuneo said.
8. ARGENTINA LINKS PESO CRASH WITH SPECULATORS SEEKING OIL RICHES (Platts Commodity News)
By Charles Newbery
28 January 2014
Buenos Aires (Platts)–28Jan2014/1248 pm EST/1748 GMT Argentina blamed speculators Tuesday for promoting a sharp devaluation of the peso last week in an effort to buy the country’s energy resources at depressed prices, including its large amounts of undeveloped shale oil and natural gas resources.
“The speculative attacks that emerging markets suffer” are “attacks against governments” that are spurred by “monopoly economic groups,” Presidential Chief of Staff Jorge Capitanich said in a televised news conference.
These attacks are at times deployed “with specific communications campaigns in coordination with monopoly media groups” with the aim of “undermining the credibility and confidence of governments,” he said.
Capitanich said this leads to a depreciation of the currency so the speculators can “buy depressed assets” and impose more orthodox economic policies to boost profit potential.
The US Energy Information Administration estimates that Argentina holds 27 billion barrels of shale oil resources and 802 Tcf of shale gas. Of that, only 13,000 b/d of oil equivalent is so far in production in Vaca Muerta, a play in the southwest of the country that is thought to have the greatest production potential.
Capitanich said speculators want a weaker peso so they can buy into Vaca Muerta at lower prices in dollar terms.
“We cannot be naive as Argentines,” he said. “We have seen this movie repeatedly throughout our history.”
He spoke a day after President Cristina Fernandez de Kirchner discussed the issue of currency speculation with her Brazilian counterpart, Dilma Rousseff, in Cuba.
Capitanich said the leaders spoke about what they view as a spate of currency attacks by speculators over the past few days on Brazil and Argentina as well as other emerging economies like India, Turkey and South Africa.
CRASH IN THE PESO
The Argentine peso dropped 18% against the dollar last week, its worst decline since the country ended a decade long one-to-one peg with the greenback during a 2001-02 economic crisis.
The Fernandez de Kirchner government responded by selling dollars out of the central bank’s reserves, lifting a ban on buying dollars for savings and accusing big business and political opponents of trying to force an economic crisis.
“It appears that some people want us to eat soup again, but this time with a fork,” the president said Monday on Twitter in reference to the hard times during the 2001-02 economic crisis.
Analysts, however, were quick to point at a hole in this argument.
“Speculation always exists in a weak economy,” said Gerardo Rabinovich, an energy expert at the University of Belgrano in Buenos Aires. “When a sheep is left unprotected the wolf is always going to attack.”
He said companies are always looking for opportunities to get into the market at a low cost, but they are not creating the conditions to do so. It is the government’s mismanagement of the economy that has brought these possibilities, he said.
Argentina is suffering from a widening fiscal deficit, dwindling dollar reserves, double-digit inflation and a shrinking trade surplus. It cannot borrow abroad to ride through some of these problems because the government has failed to fully settle a $100 billion debt default from 2001, meaning that creditors could seize the proceeds.
This has left it heavily reliant on central bank reserves, which have dropped 45% to $29.1 billion from a peak of nearly $53 billion in 2011.
The government let the peso depreciate last week after years of saying it would never do so.
LOSS OF CONFIDENCE
This sudden shift in economic policy has “cut credibility in her government,” said Carlos Germano, a political analyst in Buenos Aires.
He added that people are also growing increasingly concerned about the president’s leadership capacity.
Fernandez de Kirchner took a back seat to running the economy after head surgery and a worse-than-expected result in midterm congressional elections in October. For 42 days she didn’t make a single public appearance, and then broke the silence last week. But she made no mention of the economy even as concerns swelled about the peso, inflation and dwindling dollar reserves.
“People see a government that’s not solid enough to take on the economic problems facing the country,” Germano said.
So instead of tackling the problems head on, the president and her ministers are attacking supposed speculators.
“This buys the government time to figure out what to do,” Germano said. “It also sends a signal to society, whether right or wrong, that the government is doing everything it can but forces are out there that are trying to prevent it from doing so.”
COSTLIER E&P TO IMPACT VACA MUERTA
Now adding to the country’s economic worries — in particular for the oil sector — is the currency depreciation.
“It has got more expensive for companies to invest in Vaca Muerta,” said Rabinovich.
He said the cost of investment in exploration and production is based in dollars, including for drilling rigs and supplies. But a company can only sell the output in pesos. He said raising fuel prices at the pump is out of the question.
He said on the radio Tuesday that the government will monitor service stations to ensure they sell sufficient amounts of supplies and don’t raise prices due to the devaluation.
This hits YPF hardest. The state-run company has said it will finance 80% of its $37.2 billion investment program for boosting oil and gas production 36% by 2017 out of cash flow, largely from fuel sales. It has a 50-60% share of diesel and gasoline sales.
“You need more pesos to buy a drilling rig and other supplies now, and salaries no doubt are going to rise because of the impact of the devaluation on inflation,” Rabinovich said.
The higher cost of investment in peso terms “will delay investments in Vaca Muerta,” he added.
While YPF is the only company that has put Vaca Muerta resources into production, other companies are planning to follow suit. Chevron, ExxonMobil, Shell and Total have announced multi-million and even billion dollar pilot production projects in the run-up to putting the resources into mass production.
At the same time, Argentina is betting on shale development to return it to the energy self-sufficiency lost in the late 1990s and early 2000s as production fell on low investment, few finds and limited exploration.
This has led to a surge in imports of diesel, fuel oil, gasoline and gas, and now crude.
Argentina plans to import up to 56,610 b/d of light crude supplies over the next year, the largest amount in two decades. The effort is designed to reduce imports of costlier diesel, fuel oil and gasoline supplies and free up domestic supplies of heavier crude for export.
But with the currency depreciation and a decline in dollar reserves, it may get much harder to pay for the imports, Rabinovich said.
“Imports cost a whole lot more now in pesos,” he said.
9. KBW ANALYST: FOR CITI, CONTAGION IS THE REAL RISK (WSJ Blog)
By Maureen Farrell
28 January 2014
Citigroup has long been the most international of U.S. banks.
In recent years, that has been a good thing, as growth in emerging markets outpaced the U.S. But in recent days, that has raised questions about how much exposure Citi has to the tumult unfolding in Argentina, Turkey and South Africa.
KBW analyst Frederick Cannon says Citigroup’s exposure to Argentina, the most of any U.S. bank, should be manageable even if the country devalues its currency. In that case, Citigroup could suffer losses, but nothing to cause major issues at the bank.
The real issue for Citigroup will come if Argentina’s woes spread beyond its borders and cause investors to flee Brazil and Mexico, where Citigroup has an even larger presence.
Over the past week, the price of the Argentinian peso has fallen precipitously as emerging-market currencies have come under pressure. The country and investors around the world have been worried that the currency could continue to depreciate rapidly like it did in 2002, which caused a deep economic crisis there.
According to KBW, Citigroup is the twelfth largest bank by deposit operating in Argentina. No other major U.S. bank ranks in the top 30.
Still Citigroup’s exposure there overall is relatively small, amounting to roughly $749 million as of the third quarter of 2013 or 0.4% of the bank’s tangible common equity. Mr. Cannon calls Citi’s exposure “manageable in isolation.” Even if Citi wrote off its entire investment in Argentina based on its third-quarter figures, the bank would only take a quarterly hit of 17 cents per share.
The real risk is contagion. Citi boasts of its exposure to the emerging markets, noting that 42% of its loans are there and half of its corporate loans. As KBW notes, Citi has significantly larger exposure to Brazil and Mexico.
10. ARGENTINE GOVERNMENT REDUCES VEHICLE IMPORTS AS LUXURY TAX IMPACTS SALES (IHS Global Insight Daily Analysis)
By Stephanie Brinley
28 January 2014
Argentina is reducing the number of cars it will import in the first quarter of 2014, particularly from Brazil, while imposing a new luxury tax on imported or domestic luxury goods involving vehicles. The new tax is set at a rate of 30% on cars ranging from ARS100,000 (USD13,959) to ARS170,000, and 50% for those above ARS210,000. With the currency devaluation, the range of vehicles impacted by this tax has widened; as a result, the government may review the price ranges – the peso has lost more than 30% against the US dollar in two months. This devaluation is also likely to slow vehicle sales. This month, Argentina also lifted restrictions in place since 2011 that limited the purchase of foreign currency. The falling peso has temporarily driven up car sales as consumers look to put their money into durable goods rather than holding currency.
Significance: IHS Automotive believes that the tax on luxury vehicles will have a major impact on vehicle demand next year, primarily for the C, D, and E segments, with sales falling below 800,000 units. Our 2014 forecast anticipates 783,000 units, although sales may drop even lower given that the law was enacted in January, usually the region’s strongest month of the year. Argentina is the largest importer from Brazil, predominantly auto parts. Argentina argues that while it has a USD1-billion surplus in the trade of CBUs with Brazil, it has a deficit of USD3 billion in parts, and that gap needs to close. The authorities will continue to review the issue and should finalise an automotive agreement in the coming months. The Argentine government has been working to boost domestic manufacturing and exports, and to increase dollar inflows to tackle foreign debt, with import quotas among the measures to be implemented. The latest move was meant to account for a USD300-million reduction in foreign aid spending by the end of March; the country imported USD5 billion worth of vehicles in 2013.
11. STRAINED ARGENTINA-URUGUAY RELATIONS THREATEN TO ALTER REGIONAL TRADE FLOWS (IHS Global Insight Daily Analysis)
By Laurence Allan, Grant Hurst
28 January 2014
Commercial restrictions imposed by the Argentine government are impeding Uruguayan trade flows and are likely to make exporters more reliant on Brazil and Asia.
IHS Global Insight perspective
The Argentine and Uruguayan presidents will both be in Cuba this week, raising the possibility that the two leaders will meet to discuss ongoing bilateral diplomatic and trade difficulties. These include an Argentine ban on its exporters using Uruguay’s main port at Montevideo.
However, even if diplomatic relations become warmer, this is unlikely to result in a complete re-evaluation of Argentine trade policy, given its ongoing domestic economic difficulties.
Argentine commercial restrictions will therefore continue to impact on Uruguay, which in turn is likely to seek to build trade ties with Brazil and emerging markets in Asia.
Uruguay’s president Jose Mujica. Montevideo, Uruguay, 26 December 2013.
Argentine president Cristina Fernández de Kirchner and her Uruguayan counterpart José Mujica will attend a summit of the Community of Latin American and Caribbean States (CELAC) in Havana, Cuba on 28–29 January, raising expectations that a damaging dispute between the two countries could be resolved. Argentina’s cabinet Chief Jorge Capitanich said that Fernández will meet regional leaders to discuss improving trade ties. Uruguay has suffered from reduced trade activity since October 2013 as a direct result of commercial restrictions introduced by Fernández’s government. Mujica’s government, in early 2014, said that relations with Argentina were at their lowest point in recent years. Although a possible meeting between the Argentine and Uruguayan heads of state at the CELAC summit, or at an upcoming MERCOSUR summit in February, could ease current problems, the wider background to the dispute probably dampens that opportunity.
Activity at Montevideo port is being seriously disrupted
In November 2013, the Argentine government imposed a de facto ban on its exporters using Uruguay’s main port of Montevideo. According to the decision, Argentine cargoes must only transit via ports whose governments are part of MERCOSUR accords related to shipping. Uruguay, although a full member of MERCOSUR, has not signed the relevant agreements. According to IHS Fairplay, the move has been rumoured since 2010 and is intended by the Argentine authorities to favour Buenos Aires port. The restriction has been interpreted by Mujica’s government as retaliation for its decision in October 2013 to allow increased production at Uruguay’s UPM (formerly Botnia) paper pulp mill, a long standing issue of dispute between the two (see Argentina-Uruguay: 19 November 2013: ).
This has had significant implications for Montevideo Port, given that more than half of its throughput is transshipment, 75% of which originates from Argentina, according to IHS Fairplay. Cargo transiting Montevideo port fell by 43% during November and December 2013, according to the Uruguayan Centre of Navigation (Centro de Navegación de Uruguay: CENNAVE). There has also been a 40% decline in trade activity at the Cuenca de la Plata container facility, according to Belgian-based logistics and port operator Kateon Natie. The move has also been unpopular among Argentine exporters, who are incurring extra costs by using alternatives to Montevideo. The Argentine Chamber of Commerce has claimed that the move damages Argentine export competitiveness, and called on the government to re-evaluate the policy.
Damaging consequences for bilateral trade
The impact on Montevideo port is only one negative side effect on Uruguay of Argentina’s current attempts to lower its trade deficit and protect its foreign currency reserves, which fell below USD30 billion on 12 January (see Argentina-Brazil: 22 January 2014: ). Argentine government restrictions on access to US dollars and on the use of credit cards abroad appear to be having a serious impact on the flow of Argentine tourists into Uruguay during the current vacation high season – Uruguay’s tourism authorities assess 10% fewer Argentine visits in the early weeks of 2014 compared to 2013. The effects of Argentina’s apparent partial relaxation of currency controls on 27 January are likely to be significant for Uruguay (see Argentina: 27 January 2014: ), with a depreciating Argentine peso hitting the competitiveness of Uruguayan exports and making Uruguay more expensive for tourists spending Argentine pesos there.
A series of stringent import procedures implemented by the Argentine authorities in 2011–12 pose a major obstacle affecting the flow of Uruguayan exports to Argentina. According to local media, the value of Uruguayan exports backed up at Argentine customs has increased from USD5 million to USD15 million since October 2013. In January 2014, Uruguayan minister of industry, energy, and trade, Roberto Kreimerman, claimed that USD32 million of Uruguayan exports were delayed at Argentine customs.
Uruguayan agribusiness, manufacturers and port operators bear brunt of dispute
Continued delays to Argentine imports from Uruguay are likely to frustrate Uruguay’s agribusiness and manufacturing export sectors (including food, paper, chemicals, and clothing), which are relatively dependent on the Argentine market. In 2011, Argentina accounted for approximately USD587 million of Uruguay’s exports, making it Uruguay’s second largest export market after Brazil. Exports to Argentina fell by 14.7% in 2012, and are reported to have declined by a further 5.6% during the first eight months of 2013.
Outlook and implications
These dynamics are likely to drive diversification of the Uruguayan export market, and Mujica’s government has already taken several steps in this direction. In 2012, Uruguay set up the Markets Diversification Fund (FODIME), aimed at helping companies find alternative export markets. This has been complimented by official state visits to Asia and Europe during 2013, both of which had the declared objectives of strengthening bilateral trade relations (see Uruguay: 29 May 2013: ). China in particular constitutes a major growth market for Uruguay, exports to which increased by 45.3% in 2013. Brazil, traditionally Uruguay’s largest trading partner, is likely to continue to be a major focus, although despite 6.4% growth in exports in 2012, exports during 2013 fell by 2.2%. The entrance of Venezuela as a full member of Mercosur is also a good opportunity for Uruguay to place its food sector products.
Given that the balance of power in terms of Uruguay and Argentina’s trade relations is strongly weighted in favour of Argentina, Uruguay is highly unlikely to invoke any meaningful retaliatory measures of its own. This was underlined by Mujica’s December 2013 offer to sell energy to Argentina to help address its power shortages. In another strategy that would potentially reduce Uruguay’s economic reliance on Argentina, Uruguay is embarking upon a USD500-million development of a deep water port, largely driven by Brazilian and Chinese interest. The project, located at Rocha on Uruguay’s east coast, is reported to be 80% funded by Brazil and will aim to increase the flow of trade between the two countries while simultaneously seeking to maximise Uruguay’s export potential with a focus on its nascent paper pulp and emerging iron mining industries.
12. FORD CONCERNED ARGENTINA, VENEZUELA MAY BITE INTO 2014 PROFIT (Reuters News)
By Bernie Woodall
28 January 2014
DEARBORN, Mich., Jan 28 (Reuters) – Ford Motor Co on Tuesday joined a growing number of multinational companies expressing concern that economic turmoil in Venezuela and Argentina could spell trouble for 2014 profits.
High inflation in Argentina and Venezuela, along with concern about how the two countries’ governments will try to steady their economies has Ford rethinking its annual forecasts for South America.
Consumer prices jumped more than 50 percent last year in Venezuela and private analysts say inflation reached 25 percent in 2013 in Argentina, fueled by weakening currencies in both countries that have rattled global financial markets.
Ford’s financial outlook first presented six weeks ago called for the company to repeat 2013’s performance in South America, when it lost $34 million before taxes, compared with a profit of $213 million in 2012. Ford’s fourth-quarter losses in South America ballooned to $126 million.
“Since December, we’re more concerned,” about company performance in South America, Ford Chief Financial Officer Bob Shanks told reporters on Tuesday as the company reported an overall annual pretax profit of $8.57 billion.
Shanks said the company is poised to respond in “real time” to the changing economic landscape in both Venezuela and Argentina.
“I think that is an area that we will continue to watch very closely,” he said. Ford will likely have plenty of company.
General Motors Co newly installed Chief Financial Officer Chuck Stevens recently said that GM’s South American operations had a second straight profitable year in 2013, but that continued volatility in Argentina and Venezuela present financial risk. More details may emerge with GM reports earnings next week.
Beyond the auto industry, U.S. consumer products companies from Colgate-Palmolive to Clorox may also take a hit on the worsening crisis, in which the Argentine government’s currency controls, by limiting access to dollars, has led a mad scramble for the U.S. currency on the black market.
The exchange rate on the black market is nearly twice the official exchange rate, said Guido Vildozo, IHS Automotive analyst based in Massachusetts. This led to people selling dollars on the black market and then buying cars at the official exchange rate, “an investment in a durable good that will maintain its value even if currency inflation continues,” said Vildozo.
This led to a short-term gain for Ford and other automakers in the Argentine market last year, but Shanks said that the company hopes that the government institutes longer-term changes that while biting into new vehicle sales will make more sense for consumers and the companies that sell to them.
Last Friday, the day after the Argentine peso had its hardest drop against the U.S. dollar in a dozen years and in the face of an expected 30 percent hike in consumer prices in 2014, Buenos Aires said it would relax currency controls it had long defended as essential.
The situation is even worse in the smaller market of Venezuela, where Shanks told reporters on Tuesday, “the government is trying manage every aspect of the economy.”
“You know that just doesn’t work very effectively,” he added.
New vehicles sales in Argentina by all manufacturers were about 900,000 vehicles last year, compared with 100,000 vehicles in Venezuela.
Shanks said a lack of access to foreign currency in Venezuela has caused Ford to cut auto output there “because we simply can’t get the currencies that we need in order to pay for the parts that we need to bring in for production.”
Last week, Venezuelan President Nicolas Maduro revamped 11-year-old currency controls under pressure to fix economic ills ranging from the highest inflation rate in the Americas to shortages of bread and milk.
However, Venezuela’s benchmark bonds fell to two-year lows when investors said the moves did not go far enough to correct policies that critics say have led last year’s inflation rate of 56 percent.
FORD NOT ALONE
Colgate-Palmolive Co derives more than 80 percent of its business outside of its North American base, including 50 percent from faster-growing emerging markets, and Latin America accounts for nearly 30 percent of Colgate’s sales.
Last year, Colgate-Palmolive said it incurred a one-time aftertax loss of about $120 million to adjust its balance sheet in Venezuela, which Morningstar said hit earning by 13 cents per share.
Colgate was joined by Avon Products Inc and Clorox Co last year in having to slash prices for its consumer goods sold in Venezuela after the country’s bolivar was devalued.
13. SLIP SLIDIN’ AWAY IN ARGENTINA: DOES PRESIDENT FERNÁNDEZ DE KIRCHNER HAVE A PLAN TO SAVE HER FOUNDERING CURRENCY? (Foreign Policy Blog)
By Daniel Altman
January 27, 2014
South America Last week, Argentina’s central bank finally abandoned its hopeless battle to keep the peso at an artificially high exchange rate versus the dollar. Immediately afterward, the Argentine government decided to allow more purchases of foreign currency by its citizens. But the transition from the country’s unsustainable currency regime is far from over — and it could get much worse.
The initial devaluation of the peso came on Thursday, Jan. 23, as the central bank abstained from the purchases it had long used to prop up the currency. A drop of more than 10 percent on Thursday was followed on Friday by a smaller dip, with the peso coming to rest at about 8 to the dollar. It had hit 7 pesos just two days earlier.
Just eight months ago, Cristina Fernández de Kirchner’s government had pledged not to devalue the peso. For years, it had been trying to make the central bank’s job easier by restricting Argentines’ sales of pesos in favor of foreign currencies. But as the bank’s reserves dwindled, the risks implied by creating demand for pesos continued to grow. Last week was apparently the end of the line.
A more gradual pullback might have been preferable, but it was healthy to embrace the inevitable sooner rather than later. With the currency falling to its real value in a competitive market, there would be no more need for restrictions on trading. So far, so good, then? Not quite.
The signs of a problem began in the black market for dollars. For the past several years, the black market has operated in plain sight to fill Argentines’ demand for dollars. Private traders sell dollars for many more pesos than the official rate to people who need them for travel, to invest, or simply because they think the peso will lose value in the future.
Before Thursday’s events, the main black market rate, known as the “blue” dollar, sat at about 11.8 pesos. On Monday, after some ups and downs, it settled around 11.7 pesos. To an outside observer, the gap with the official exchange rate looked smaller, which would have been a sign of progress. But from the point of view of an average Argentine, the gap had barely changed at all.
The reason was in the fine print. The government announced on Monday that households with monthly incomes of at least 7,200 pesos would be allowed to buy $2,000 at the official rate each month, more than enough for most Argentines (or at least those with the requisite income). But there was still a surcharge on many of these transactions. For purchases and withdrawals from businesses and banks abroad, the previous surcharge of 35 percent was lowered to 20 percent. Before, the surcharge resulted in an effective exchange rate of about 7 x 1.35 = 9.5 pesos to the dollar. After the change in policy, the effective rate was 8 x 1.2 = 9.6 pesos.
In this case, no news was bad news. The greater availability of dollars should have reduced the gap between the official and black market rates, but neither really changed. Why not?
Argentines may now be skeptical that, having started the peso’s slide, the government can also stop it. As the value of the peso drops, some businesses will be tempted to raise their prices more quickly. But with heightened inflation, a freely floating peso might fall faster as well. In the absence of a credible plan from the government for keeping prices in check — its existing price controls have hardly done the job — a downward spiral could ensue. To all appearances, uncertainty about prices and the peso is still generating demand for dollars in the black market.
So far, Fernández’s government has done little to combat it. Last week, Axel Kicillof, Argentina’s fourth economy minister in five years, and Jorge Capitanich, the cabinet chief, gave conflicting versions of the new rules for trading currencies, citing different surcharges for transactions (dramatized in this cartoon by Javier Rodríguez). On Monday, Jan. 27, Capitanich said the government would publish the names of every purchaser; he later reversed himself. Meanwhile, Kicillof promised to punish businesses that raised prices after the devaluation.
But to stabilize the peso, the government will have to fight inflation with more than rhetoric and threats. The process will not be easy, since inflation in Argentina is like the needle tracks on an addict’s arm — the ugly and unmistakable side effect of a long-term habit. For Fernández, the habit is spending.
During the global boom in commodities, Argentina’s central bank printed pesos to buy the foreign currency earnings of the country’s exporters. Rather than putting the resulting reserves into a sovereign wealth fund, the Fernández government used them to fund enormous increases in public sector salaries, infrastructure projects, and subsidies for energy and other essentials. These huge injections of cash into the economy did not come with equal growth in the production of goods and services, however, so inflation of more than 20 percent became commonplace.
If the government doesn’t rein in its spending, then prices will keep rising while the peso keeps slipping. This process is not always orderly, and any moment of panic can lead to hyperinflation and bank runs. But with less than two years left in her last term, Fernández may be willing to take the risk.
Daniel Altman is the global economics columnist for Foreign Policy. He also teaches economics as an adjunct at the Stern School of Business at New York University. He is a member of the Council on Foreign Relations and serves on the expert advisory board of Dalberg Global Development Advisors. Altman previously worked as an economic advisor in the British government and as an economics columnist at The Economist and The New York Times. He is the author of four books: the international bestseller “Outrageous Fortunes: The Twelve Trends That Will Reshape the Global Economy” (Times Books, 2011), “Power in Numbers: UNITAID, Innovative Financing, and the Quest for Massive Good” (PublicAffairs, 2010; with Philippe Douste-Blazy), “Connected: 24 Hours in the Global Economy” (Farrar, Straus and Giroux, 2007), and “Neoconomy: George Bush’s Revolutionary Gamble With America’s Future” (PublicAffairs, 2004). Altman has lived and worked on four continents and is a citizen of the Canada, the United States, and the United Kingdom. He holds a Ph.D. in economics from Harvard University.
14. ARGENTINA’S ECONOMY IS CRATERING, AGAIN (The New American)
By Bob Adelmann
27 January 2014
While Wall Street declined by three percent over global growth concerns last week, few were noting or even interested in the 11-percent decline in the Merval, Argentina’s stock market index. It hit a high of 5,970 on Tuesday, January 21, the day before the Argentina government devalued its currency. It closed at 5,337 on Monday. The peso itself has been in decline far longer, having lost nearly 35 percent of its value against the dollar over the last 12 months.
In an address to her country the day after the devaluation, Argentina’s President Cristina Fernandez, in a brilliant display of economic ignorance and hubris, announced her solution to the problem: more government spending. This time, she announced a 600-peso ($84) monthly “stipend” to students, to be paid for with more printing-press money.
This was entirely predictable: Efforts were made to grow Argentina’s economy through deficits, and inflation of the currency rose as the peso lost value, reaching 28 percent last year. As citizens tried to preserve what little purchasing power they had left, Fernandez clamped down with more than 30 different stifling capital controls. This would force those with capital to suffer the brunt of the inflation. Those controls included:
• Increased taxes on credit card purchases
• Limits on online purchases of products made abroad
• Taxes on vacations taken outside the country
• Limits on purchases of foreign currencies
• Confiscating private pension plans, converting them into pesos, and then adding them to the country’s social security fund
• Prohibiting foreign companies with a local presence from sending their profits back home
• Surcharges on airline tickets to foreign destinations
• Limits on ATM withdrawals, and only in pesos, not dollars.
The results were also predictable. Citizens who exited the country packed whatever dollars they had into the bottom of suitcases; others put them in safe deposit boxes or hid them under their mattresses. When local police went on strike for higher wages, riots broke out. That was followed by looting. Shop owners were traumatized. Dominga Kanaza, the owner of a corner grocery in downtown Buenos Aires, refused to open the shutters on her store, telling reporters, “It was scary,” and the worst situation she had seen since similar riots occurred during Argentina’s economic collapse and $95 billion default back in 2001.
Soybean farmers began to hoard their harvests rather than bringing them to market, predicting that soy would retain its value better than the peso.
When Vale, the world’s second largest mining company in the world, cancelled plans to invest $6 billion (American dollars) in a new potash mine in Argentina, things got rough. The company did the math and decided that the gap between Argentina’s official and black-market exchange rates would force it to invest real dollars into a project that would only pay back pesos in profits. Argentina’s chief enforcer, Interior Secretary Guillermo Moreno, demanded a meeting with Vale company officials at which he threatened them with jail unless the agreement was reinstated.
The last time such measures were instituted, they were called colloquially “corralito,” meaning that the free market’s operations were corralled or limited so that the government could work its will on it and on the citizens involved in it. This occurred the last time Argentina tried to resist the inevitable effects of making promises it couldn’t keep and then paying for them with phony money. The “corralito” in 2001 froze bank accounts while forbidding the withdrawal of dollars and only allowing minor withdrawals of pesos. This was instrumental in collapsing the economy.
The economy began to revive when the “corralito” was lifted by Roberto Lavagna, who served as Argentina’s minister of economy and production from 2002 to 2005. As it was lifted, the value of the peso stabilized, trade surpluses began to reflect a growing economy, and unemployment began to decline. The poverty rate dropped, and for a period of time Argentina’s economy thrived.
But with the election of former President Nestor Kirchner’s widow, Cristina, in 2007, government promises abounded, with public works programs announced that were promised to offset the impact of the worldwide Great Recession. That was the beginning of the end of the Lavagna resurgence and the beginning of the new “corallito.”
Unless and until Argentina and its citizens learn from history, it will be forced, once again, to enjoy the fruits of government intervention in the free market, running the risk of turning today’s “corrallito” into a “corralón” — a big corral of even more draconian measures, setting the stage for yet another Argentinian crisis that could equal or exceed that of 1998 through 2001.
A graduate of Cornell University and a former investment advisor, Bob is a regular contributor to The New American magazine and blogs frequently atwww.LightFromTheRight.com, primarily on economics and politics.