Capital controls return to Argentina as Mauricio Macri fights to survive

President Mauricio Macri has been fiercely critical of capital controls in the past

Facade of Argentina's Central Bank in Buenos Aires. President Mauricio Macri on Sunday imposed foreign exchange controls on Argentine exporters as the peso continues to decline in value. AFP. 
Facade of Argentina's Central Bank in Buenos Aires. President Mauricio Macri on Sunday imposed foreign exchange controls on Argentine exporters as the peso continues to decline in value. AFP. 

Argentina’s President Mauricio Macri imposed capital controls in a blunt policy reversal aimed at containing the country’s escalating financial crisis and earning a slim chance at re-election - or at least seeing out the remainder of his presidency.

In a rare Sunday intervention, the central bank ordered exporters to repatriate foreign currency from the sale of their goods within five days, among other measures. Companies will need the authorisation of the bank to buy dollars in the foreign exchange market, except in cases of international trade. Individual Argentines, meanwhile, will be limited to dollar purchases of no more than $10,000 (Dh36,725) per month.

The move represents a bitter irony for the pro-market president, who set about dismantling capital controls as soon as he took office in 2015. Amid rising public panic and the looming spectre of default, Macri is trying to stem the haemorraghing of dollars from the country by ripping up his orthodox economic policies, reintroducing the kind of interventionist measures he once excoriated.

With presidential elections eight weeks away, Macri trails former cabinet chief Alberto Fernandez by a seemingly insurmountable distance. While the latest measures are unlikely to turn the tide, they may help Macri to become the first non-Peronist president to finish his constitutional term in recent Argentine history.

“There’s a phenomenal crisis of confidence in the economy, and the government is trying to patch up the effects of this crisis with the controls,” Fausto Spotorno, economist and director of the Orlando Ferreres & Asociados consultancy in Buenos Aires, said. “We still don’t know if these patches will work.”

In a note published later on Sunday, the International Monetary Fund described the move as “capital flow management” and said that it would “continue to stand with Argentina during these challenging times”. Last week, the Macri administration announced plans to renegotiate payments on $44 billion it has borrowed from the IMF.

Speaking on local TV late on Sunday evening, Economy Minister Hernan Lacunza said that though the measures might be uncomfortable they would avoid worse outcomes. “Argentina is like a boat stuck in circles, always returning to the same port. This isn’t the port we dreamed of,” he said. “Now the challenge is to dock the boat on the pier on December 10.” That date is when Macri’s mandate ends.

Macri’s vice-presidential candidate Miguel Angel Pichetto also told local media that the government had taken the decision to ensure that volatility and short-term lack of liquidity did not impact Argentines. “When the dollar rises, supermarket prices go up,” he said.

The campaign has taken a backseat role as the government focuses on reassuring Argentines, according to an official from the presidency who declined to speak on record. While campaigning with currency controls in place is bad, it’s even worse with the exchange rate spiraling out of control, the person added.

Sunday’s move shows how the crisis has moved beyond international bond investors to affect ordinary Argentines, who may choose to save in dollar bank accounts.

In the aftermath of the August 11 primary elections that showed Fernandez on course for victory in October, Argentine depositors withdrew hundreds of millions of dollars from their accounts - cash the central bank counts as part of its gross foreign reserves. These withdrawals, coupled with a sale of dollars by policy makers to shore up the peso, has led to a dramatic fall in the country’s stock of reserves.

Around $3 billion drained out of foreign currency reserves on Thursday and Friday alone after the government changed terms for its short-term debt. The country risks exhausting its net reserves, which stand at under $15bn, within weeks if it keeps losing money at this pace.

The peso depreciated more than 25 per cent last month after primary election results showed the market-friendly government has little chance of retaining power. Interest rates soared as the central bank tried to roll over debt, culminating in a decision on Wednesday to delay payments on $7bn of bills that are due this year.

Opposition advisers had called for currency controls. Fernandez himself said the government was in “virtual default” but added that he was unwilling to support emergency measures designed to control rising volatility. Total central bank reserves have slumped to $54.1 billion, from $66.4 billion the day before last month's primary election.

As well as pushing back maturities on local short-term debt on August 28, Argentina also said it will ask holders of $50bn of longer-term debt to accept a “voluntary re-profiling.”

Fitch Ratings now classifies Argentine debt as RD, or restricted default; Standard and Poor’s as CCC-; and Moody’s as Caa2. Credit default swaps are pricing in a more than 90 per cent chance of a fully-fledged default within five years.

For Juan Diaz Cruz, the director of political risk advisory firm Cefeidas, the economy minister and the central bank will have to adopt further measures in the days to come.

“Today the objective seems to be to contain the economic and financial deterioration,” he said. “To generate greater credibility in the ability of the government to make it to the elections at least minimally competitive.”

Updated: September 2, 2019 12:56 PM


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