Vulture’ funds deal There could be a light at the end of the tunnel in the long legal battle between the “vulture” funds and Argentina, no matter who gets elected. Scioli and Macri agree on the need to solve the issue in order to have access to funding from abroad and at a lower interest rate, closer to the rest of the region. “With a Scioli victory there will be high tension between the staunchest Kirchnerite supporters and his advisers who want a deal. Whoever wins that fight will mark if the stand with the holdouts remains strong or softens,” Jorge Ignacio Frechero, a debt expert and researcher at the CEIPIL think tank, told the Herald recently. “Taking a more pragmatic stance on the issue will also depend on next year’s economic scenario.” United States District Judge Thomas Griesa recently acknowledged claims of 15 more “me-too” bondholders, raising the bill of the government with the holdouts to US$10 billion, a ruling the government has already appealed.

Sunday, November 22, 2015

Dollar shortage: main challenge for next gov’t

A woman walks past a pro-government poster against the “vulture” funds in a file photo.

By Fermín Koop
Herald Staff

Man who wins today’s election will have to deal with a strong peso and persistent inflation

With the shortage of foreign currency at the top of the list, whoever wins today’s runoff will have to deal with a set of economic woes that have worsened over the past few months, all of which have been acknowledged by Victory Front (FpV) candidate Scioli and his Let’s Change (Cambiemos) rival Mauricio Macri but will be addressed differently depending on who is elected.

The likelihood of a steeper devaluation after the elections has led to an across-the-board increased demand for dollars, forcing the Central Bank to sell US$1.8 billion so far this month to maintain the peso stable. Foreign-currency reserves have already dropped US$1.1 billion in November, ending the week at US$25.833 billion.

The high demand for dollars for saving and tourism purposes and debt payments are some of the factors that explain the drop, with people seeking to anticipate to a weaker peso. So far this month, US$630 million have been sold in the dollar for savings programme, only US$73 million short from the record reached in October and easily exceeding the US$403 million sold in the same month last year.

While Scioli has repeatedly dismissed the idea of a devaluation and said the exchange rate would be at 10 pesos to the dollar in January, Macri has hinted at a devaluation, claming a balanced exchange rate would be at 12 pesos and not at 16, the current “blue” dollar exchange rate. The peso has seen a much slower depreciation than the currencies of the rest of the region, which, according to economists, is affecting some sectors of the economy.

“The lack of dollars is the most urgent issue to deal with. It has become more of a concern in the last few weeks. Buying dollars needs to stop being profitable, when that happens demand will drop and the market will balance out,” Fausto Spotorno, economist and director of the Economic Studies Centre at the Orlando Ferreres consultancy, told the Herald. “Purchasing power will drop after the elections.”

Following a weaker peso and with either a Scioli or Macri win, the current foreign currency restrictions are set to ease up, a task that won’t likely be as easy as the camping promises, economists told the Herald.

Scioli has hinted at a more gradual shift to less foreign currency restrictions that will be linked to the amount of dollars he can get a hold of to take such a measure. Reserves would grow US$20 billion in March, he said, from loans international agencies have already promised him if he is elected.

Although people will be able to buy foreign currency with fewer restrictions, other limits wouldn’t be that quickly lifted with either of the presidential hopefuls.

The government now limits the amount of dollars for importers, and has accrued a debt of between US$8 billion and US$9 billion with them. Macri has already rejected opening up imports right away and said he would negotiate the debt and pay through a bond. The same would be the case for foreign companies, which now are limited to the amount of dividends they can send to their headquarters.

“If the next administration allows companies to send all their profits, investments that are now postponed will likely be carried out. But the capital outflow will likely happen first before the capital inflow. The key here is gradualism,” Mariano Kestelboim, Buenos Aires University economist, told the Herald. “There are a lot of funds pending to be sent as well as a growing debt with importers.”

That means non-tariff barriers to trade and widespread import controls are likely to continue, at least initially. The lack of dollars would make it practically impossible for the next administration to open up the economy to a degree that would be significant enough to boost the flow of imports. The government will have to stop using controversial import permits — commonly known as DJAI — but could come up with a similar instrument after that.

Lower deficit, lower subsidies

President Cristina Fernández de Kirchner is set to end her term with four consecutive years of a primary budget deficit, which went negative for the first time in 2012 after 16 years. The drop will be larger when looking at the financial result, which includes debt payments.

Economy Minister Axel Kicillof said 2015 would end with a fiscal deficit of 3.5 percent of the GDP, while economists claim that figure would reach between six and seven percent.

A large part of that deficit comes as a consequence of the growing subsidies for the energy sector which reached 87.5 billion pesos in the first seven months of the year — 24 percent more than the same period last year. That’s a much steeper increase than the five percent reported in the first six months of the year.

An issue agreed on by both candidates is that higher utility bills are expected in Buenos Aires City and its suburbs with the next administration as subsidies would no longer be granted across the board. Prices have been kept largely frozen since the 2001-2002 economic and financial crisis. CFK tried to cut subsidies in 2011 but the shock was so great that some took to the streets to protest and the government ended up backtracking.

“There will be a fast change on the energy subsidies policies but it will be selective. It’s the only way of solving the growing fiscal deficit. The current scheme isn’t fair, the government is giving subsidies to people who don’t need them. That has to be corrected and it won’t have a large political cost,” Rodrigo Álvarez, head of the Analytica consultancy, told the Herald. “Vulnerable sectors will still have their subsidies.”

‘Vulture’ funds deal

There could be a light at the end of the tunnel in the long legal battle between the “vulture” funds and Argentina, no matter who gets elected. Scioli and Macri agree on the need to solve the issue in order to have access to funding from abroad and at a lower interest rate, closer to the rest of the region.

“With a Scioli victory there will be high tension between the staunchest Kirchnerite supporters and his advisers who want a deal. Whoever wins that fight will mark if the stand with the holdouts remains strong or softens,” Jorge Ignacio Frechero, a debt expert and researcher at the CEIPIL think tank, told the Herald recently. “Taking a more pragmatic stance on the issue will also depend on next year’s economic scenario.”

United States District Judge Thomas Griesa recently acknowledged claims of 15 more “me-too” bondholders, raising the bill of the government with the holdouts to US$10 billion, a ruling the government has already appealed.

Statistics review

Despite the changes introduced last year to the official price index, inflation statistics published by the INDEC statistics bureau continue to be under scrutiny as opposition consulting firms are still publishing their own data that differs from the government-sponsored numbers. Macri vowed to carry out sweeping reforms in the way figures are measured, while Scioli would seek to turn INDEC into a more federal agency with a stronger role of all the provinces.

@ferminkoop