| BUENOS AIRES
BUENOS AIRES Jan 27 Argentina's sudden
relaxation of currency controls, long touted by the government
as essential to the country's financial health, has left
investors wondering what's next for Latin America's crisis-prone
No. 3 economy.
Shopkeepers around the country hurriedly placed new price
tags over the weekend on imported items from Cuban cigars to
Asia-made televisions, reflecting a more than 20 percent drop in
the official peso rate over recent days.
The consumer price surge came after the government said on
Friday it would lift a two-year-old ban on Argentines buying
foreign currency, allowing savers access to coveted U.S. dollars
while the peso was left to plummet.
Friday's relaxation of controls came as central bank
reserves fell beneath $30 billion, a level suggesting its
interventions in support of the anemic peso had become
But allowing average wage-earners to access U.S. dollars was
sure to pressure reserves as well, because the central bank is
the main source of foreign exchange. The announcement on Friday
ended a two-year ban on saving in the greenback.
Conditioned by previous crises to save in dollars,
Argentines are obsessed with the greenback. The currency control
regime ending on Monday forced people to go to the black market
for dollars needed to protect them from the weak peso and
fast-rising consumer prices.
The government, which consistently plays down the problem of
inflation, is betting that the relaxation of controls will allow
convergence of official and black-market peso rates.
The official rate ended at 8 per dollar on Friday
after falling 11 percent on Thursday, its biggest one-day slump
in 12 years.
"An exchange rate of 8 pesos is an adequate level," Economy
Minister Axel Kicillof said in a newspaper interview published
on Sunday. "This is a reasonable level of convergence for the
The black-market peso fell 7.25 percent on Thursday
to close at 13.1 per dollar. On Friday, it rose 11.97 percent to
end at 11.7 per greenback.
Consumer prices rose about 25 percent in 2013, according to
private analyst estimates. Official data, which many economists
dispute, clocks inflation at less than half that rate. A new
government consumer price index, ordered by the International
Monetary Fund, is expected to be unveiled next month.
A price freeze imposed this month on staple foods has kept a
lid on basic supermarket items. No one knows how long those
prices can hold while labor unions prepare wage demands based on
one of the world's highest inflation rates.
While inflationary, President Cristina Fernandez's policies
were seen by most voters as the key to economic recovery from
the 2002 debacle. She easily won re-election in 2011, promising
deeper market interventions and more stimulus spending
unencumbered by inflation targeting.
GRAINS TRADE PARALYZED
The effect of peso volatility on other countries' markets
should be limited by the fact that Argentina has been unable to
issue international bonds since its 2002 sovereign default.
Argentina's grains sector has held back exports as farmers
hoard crops rather than expose themselves to the swooning local
currency. That has contributed to the scarcity of dollars that
has debilitated the peso.
The country is the world's top exporter of soymeal and
soyoil, as well as its No. 3 soybean and corn supplier at a time
of booming world food demand.
The 2002 default, followed by a decade of policies such as
corn export curbs, high soybean export taxes and the 2012
nationalization of the country's top energy company, YPF
, scared off investment needed to expand the grains
sector and exploit Argentina's huge shale oil and gas reserves.
If Argentina reports 30 percent inflation this year, as
private analysts expect, it would mark the fastest rate since
the 2002 crisis, when inflation reached 41 percent.
Consumer prices are a big worry on the street, but the issue
has not sparked mass protests lately. Tensions could rise over
the weeks ahead as labor demands pay increases in line with
private economists' 2014 inflation estimates.
Fernandez has mentioned neither consumer prices nor the
peso's plight in recent speeches, leaving her cabinet to
announce policy changes. The next presidential election is next
year, with Fernandez unable to seek a third term.
Possible candidates from the main parties offer policies
that lean in a more pro-investment direction that Fernandez's,
as the outgoing leader tucks into her last two years in power.
"If the government fails to prevent inflation from
accelerating it will probably hurt the chances of presidential
aspirants who are aligned with the administration," said Ignacio
Labaqui, an analyst with Medley Global Advisors.
"A deeper economic crisis could provide a window of
opportunity for candidates who are more business friendly."