Friday, December 11, 2015

New gov’t works to obtain new lines of credit

Finance Minister Alfonso Prat-Gay takes the oath of office yesterday.

By Ignacio Portes
Herald Staff

Finance Minister Prat-Gay says package of reforms won’t be presented in near future

President Mauricio Macri’s brand-new economic cabinet is facing major short-term challenges to make good on its campaign promise to lift the so-called “clamp” on foreign currency trading as soon as possible, but it is betting on foreign loans to ease the social impact of the big devaluation which is likely to follow such a move.

A spokesperson for the Finance Ministry told the Herald yesterday that Finance Secretary Luis Caputo’s trip to New York did not only include a meeting with Special Master Daniel Pollack to re-start negotiations on the so-called “vultures” conflict, but also talks with private banks that could lend the country cash to ramp up the rapidly-falling Central Bank foreign currency reserves.

Negotiations include most of the biggest foreign banks that have offices in Argentina.

The more foreign currency in Central Bank’s coffers when exchange restrictions are lifted, the lower the risk of a run against the peso sending the exchange rate above the levels desired by Macri’s team.

Figures ranging from US$5-8 billion in loans are being bandied about, but Let’s Change says nothing has been signed yet. Any announcement or precise figures will still have to wait.

Reserves currently stand at a nine-year low of US$24.8 billion, having plunged by US$225 million yesterday following a change at the top of the institution. It was the first day in which the Central Bank was not ran by Alejandro Vanoli, who quit on Wednesday. He will soon be replaced by Federico Sturzenegger, one of Macri’s PRO party’s long-standing economists.

Slowing down

Macri had said during the campaign that lifting trade restrictions could easily be done on the first day of his presidency, as opposed to what opposition candidates Daniel Scioli and Sergio Massa’s economists, who backed a “gradual” approach to minimize the risk of “shocks,” had recommended. But the new government has been playing down those expectations recently.

Yesterday, Finance Minister Alfonso Prat-Gay said: “We have a complicated legacy but it can’t be compared with previous moments in history”.

“We will not declare any bank holidays or apply anti-hoarding laws. The country’s conditions are good,” Prat-Gay said, dispelling alarmist fears in a press conference. As a result of that, he argued, “no major package of economic announcements should be expected” either.

Those words meant that he was backtracking from a previous announcement in which he promised that a series of bills would be sent to Congress as soon as he took office.

On Sunday, Prat-Gay had also said that some pre-conditions needed to be met before foreign currency trade restrictions could be lifted: ensuring that Vanoli was replaced by someone who shared Macri’s economic outlook and having “a good amount of dollars available.”

Prat-Gay said those dollars would come from a combination of previously unsold grain and “another source which we will talk about in more detail when we secure it.”

That means that some weeks could pass before restrictions are lifted.

In the same interview, Prat-Gay also suggested that he would welcome visits from the International Monetary Fund (IMF), which could be a first step for once again requesting loans from that organism, although he said it was not a priority.

The task ahead

Prat-Gay and Sturzenegger’s task of ending controls will face the challenge of finding a way of controlling the growing amount of circulating pesos, which have been stopped from chasing the country’s relatively cheap dollar reserves by those regulations.

The high amount of peso-denominated dollar future contracts due in 2016 signed by the outgoing administration, plus the growing budget deficit, mean that the problem could grow next year.

If the “clamp” is opened and the remaining reserves are chased by too many pesos, the country’s exchange rate could soar, leading to rapidly rising inflation rates as imports become more expensive.

To stop that from happening, Sturzenegger could raise interest rates for peso deposits or raise more dollars to help balance the level of circulating pesos.

According to the Buenos Aires-based brokerage Puente, a combination of some devaluation, some interest rate hikes, some foreign loans and the already-announced reduction of export duties are likely to be the formula chosen by the new administration.

As many of the Central Bank reserves are not readily available, “the authorities are likely to rely more on interest rates than on Central Bank intervention to keep the exchange rate from overshooting,” Puente said.

Higher interest rates, however, curb inflation at the expense of reducing local credit and economic activity, increasing the risk of an economic contraction.

Still, lifting the “clamp” is a priority in Let’s Change’s economic programme, as the party wants to lure foreign investors into the country as soon as possible.

Social impact

At the Buenos Aires stock exchange, the market has been bearish in the days following Macri’s victory. Stocks have been stable or even down, with investors arguing that they will not bring more money into the country until reforms are fully confirmed.

Some investors feared that Prat-Gay’s latest words, which were more cautious than the “shock” liberalization approach suggested during the campaign, were a sign of doubt or weakness from what had so far been their favourite party in the Argentine landscape.

But Prat-Gay seems to be shifting towards a more cautious approach.

With inflation already rising rapidly on the expectation of a plunge in the value of the peso (more than one point in just the last week according to the Elypsis consultancy agency, the highest since February 2014, in the aftermath of the devaluation the previous month), Prat-Gay suggested that an inflation-targetting approach would have to be negotiated between the state, companies and unions, where all agreed to limit money-printing, price hikes and wage demands in order to keep things relatively under control.

Former vice-presidential candidate in the PASO primaries Lucas Llach, who is likely to be named as Sturzenegger’s second-in-command at the Central Bank, also said he favoured such an approach.

Still, a combination of recession and rising inflation is seen as almost inevitable even by economists close to the government.

They are hoping that the economic recovery will start by next year’s third quarter, while others are more pessimistic about such a time frame.

@ignacioportes