ARGENTINA´S MAURICIO MACRI FACES BATTLE WITH CENTRAL BANK / THE FINANCIAL TIMES

Argentina’s Mauricio Macri faces battle with central bank

Benedict Mander in Buenos Aires and John-Paul Rathbone in London

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©Bloomberg

 

It is a measure of the challenges facing Mauricio Macri as Argentina’s president-elect that on the eve of his electoral victory, as champagne cooled in the fridge and most Argentine minds were elsewhere, the central bank issued a stealthy decree enabling it to raid bank deposits.

 

In a bid to bolster precariously low foreign reserves, the institution ordered Argentine banks to sell half their dollar assets at an unfavourable exchange rate. For Mr Macri’s camp it was jut another reason why central bank chief Alejandro Vanoli has to go.

“The central bank is our most urgent problem,” said Federico Pinedo, a leading congressman for Mr Macri’s Pro party, who has filed a legal complaint against Mr Vanoli that led to a police raid on the bank last week.

 

In addition, though, the move went to the heart of the most pressing problems Mr Macri faces when he assumes the presidency on December 10: what to do about Argentina’s overvalued exchange rate and how to best dismantle capital controls.

Few issues are more divisive in a country where people look to the dollar as a store of value and where the outgoing government of Cristina Fernández has used every trick in the book to prop up the Argentine peso in order to suggest all is well.

“If you look at the numbers, which do not lie, they clearly show that when it comes to the economy, the government of Cristina Fernández did little good,” said Luis Secco, an Argentine economist.

 

Leaving aside Mr Vanoli’s legal problems, the broader fix that Argentina’s central bank is in is plain to see — especially as Mr Macri has pledged to dismantle its system of currency controls on “day one” of his presidency in a bid to restore market confidence.

The official exchange rate is 9.6 pesos to the dollar, but in the black market it trades at about 15. To support the official rate, the central bank therefore needs to sell dollars for pesos.

However, it lacks sufficient dollars to do so indefinitely.

“The appreciated peso and exchange rate controls are choking economic growth,” Pilar Tavella and Sebastian Vargas, analysts at Barclays, said in a note to clients.

The logical alternative is to devalue — especially as the currency of Brazil, Argentina’s biggest trade partner, has fallen 45 per cent against the dollar over the past year, while the peso has dropped just 14 per cent.

The peso’s devaluation “is one of the most anticipated in Argentina’s history”, said Mr Secco, who argued that current exchange rate policy is unsustainable given hard currency reserves at an almost 10-year low.

According to the central bank, reserves are less than $26bn. But Nicolás Dujovne, an economist, said liquid reserves are just $2.7bn. Moreover, these are falling “dangerously” fast, dropping more than $1bn in November.

This is the backdrop to two recent central bank moves.

One is the November 21 order that commercial banks must sell half their dollar holdings at the official rate. Mr Dujovne estimated the move, which recalls the government’s 2008 nationalisation of pension funds, could add $1.2bn to reserves.

The other has been the central bank’s attempt before the election to prop up the official exchange rate by selling about $17bn of future dollar contracts.

The scheme, under which investors can buy dollars six months ahead for about 11 pesos to the buck, essentially guarantees healthy profits if there is a devaluation before then. That has produced almost “unlimited demand” from investors, said Mr Pinedo.

As a way of propping up the peso, though, this also virtually guarantees large losses for the central bank. Hence the legal complaint lodged against Mr Vanoli, who has been charged with damaging the national patrimony by selling futures at an artificially low rate.

At his first press conference as president-elect, Mr Macri asked Mr Vanoli, who has headed the central bank since October 2014, to resign.

Mr Vanoli has refused to step down before his term officially ends in 2019, saying: “You don’t appoint someone because they want a central bank that’s at the service of a devaluation.”

The central bank’s complications go further still. Lacking reserves, economists say it will be difficult for the incoming government to remove capital controls and avoid the exchange rate “overshooting” to a much weaker level. That, in turn, would fuel inflation already running at more than 20 per cent.

In addition, Argentina’s racing inflation is due to a collapse in the independence of the central bank, which has been forced to print money to finance a fiscal deficit estimated at 7 per cent of gross domestic product.

 

Although Mr Macri insists he wants to remove capital controls and unify the exchange rate, there is disagreement within his camp as to how fast the economy should be opened after more than a decade of isolation from international markets.

That, plus the political fallout of a sudden move and the possibility of other financial time bombs lurking in the vaults, explains Mr Macri’s call for “patience” on Monday when asked about his precise economic plans. “We really don’t have good information. We still don’t know [the exact situation we are inheriting],” he said.