December 17, 2015 12:35 am
Argentina has lifted capital controls and will allow practically unlimited access to foreign currency in a process that will allow the peso to float more freely, finance minister Alfonso Prat-Gay said late on Wednesday in Buenos Aires.
“Whoever wants to buy dollars can buy them and whoever wants to sell them can sell them,” Mr Prat-Gay said.
The move is expected to trigger a sharp depreciation of the peso when the market opens for trading on Thursday.
Rolling back what is popularly known as the “dollar clamp” was one of new President Mauricio Macri’s priorities and marks his biggest pro-market shift since he was sworn in last Thursday.
“There is no magic number,” Mr Prat-Gay said when asked what the government saw as an ideal exchange rate, although he repeatedly referred to the blue-chip swap, currently trading at 14.3 pesos per dollar, as being most representative of the market.
Analysts say the peso could fall as much as 30 per cent to bring what has been a tightly controlled official exchange rate of 9.8 pesos to the dollar closer to the 14.5 per dollar rate at which the currency is trading on the black market.
“It will likely reach somewhere between 13.50 and 14.50,” Alejo Costa, chief of research at Puente, a local brokerage, said.
The minister emphasised the exchange rate would not be administered by Argentina’s central bank in what he referred to as a “dirty float” system.
The need to build the monetary authority’s coffers to manage a potential run on the peso was one of the priorities of Mr Macri’s administration. The government is now confident that $15bn-$20bn will come into the country over the next month through increased exports, new lines of credit from foreign banks and an imminent deal with China to convert renminbi that are in reserves into dollars, Mr Prat-Gay said.
“Lifting the clamp will be the jumping off point for economic growth,” Mr Prat-Gay said.
The full lifting of the clamp begins to unwind a policy first implemented in 2011 as a way to avoid depreciating an overvalued peso amid soaring capital flight. A measure that at first only required the AFIP tax bureau to authorise purchases of foreign currency, quickly expanded its tentacles through all corners of the economy.
The goal of the controls may have been to prevent capital flight, but foreign investment dried up. “The ‘clamp’ managed to kill the supply of dollars and not the demand,” Mr Prat-Gay said.
Mr Costa noted that Argentina had received less than 1 per cent of its GDP in foreign capital over the past four years while Uruguay, its smaller neighbour, had received some 10 per cent and Colombia 5 per cent.
Keeping the restrictions was becoming increasingly expensive as the pre-announced devaluation made exporters wait to sell their products abroad, cutting central bank reserves by about $200m a day since Mr Macri took office.
The impending devaluation should lead to a surge in exports that would provide a cushion to reserves. Grain exporters have committed to sell $400m per day over the next three weeks, Mr Prat-Gay added.
The new administration’s challenge now is to make sure that the devaluation does not lead to a spiralling of already high inflation. To that end it has already shown signs that it is willing to raise interest rates.
“Lifting the clamp is not going to be neutral for inflation and lifting rates is not going to be neutral either,” said Fausto Spotorno, chief economist at Orlando Ferreres & Asociados, a consultancy, “but you have to do it in order to boost the country’s economy in the medium-term.”