Since November 2011, Argentina has lived with financial restrictions except for three and a half years, from the beginning of 2016 to September 2019. The perspective is that it will have many more years of exchange restrictions, at least during the entire government of Alberto Fernández.
The reason why the restrictions were set is that the Central Bank ran out of reserves to defend the exchange rate. Removing the restrictions would imply a devaluation that almost no politician in the world would be willing to carry out. In fact, one of the criticisms on Macri was lifting the restrictions too quickly. To remove the restrictions, it is necessary to accumulate a dose of credibility that Argentina does not have today, or to have a weak currency that is not a politically viable alternative.
The first problem in lifting the never-ending restrictions is that international reserves are almost non-existent and will hardly rise in the coming years. The higher income that can come from better terms of trade will have to be used to pay debts or regularize import payments. Countries in general raise their reserves with capital inflows, but unfortunately the lack of credibility generated by the default and the interventionist policies have slowed down the interest of investors to bet on Argentina.
The second problem is the FX spread, which after a certain “tolerable” threshold, which can be around 20 or 30%, becomes a phenomenal distortion, which among other things prevents the possibility of rebuilding the reserve position. In 2020 Argentina registered a trade surplus of goods of more than 12.5 billion dollars. However, less than 8,500 million came into Argentina, but when the account is made with CIF imports to compare pears with pears, it is seen that the income of dollars in the FX market was less than 6,200 million, that is, 49% of accrued. In the years without restrictions, the results were diametrically opposite: in 2016 the accrual was one third of the surplus on cash basis and in 2017 and 2018 there was a trade deficit registered by INDEC and a surplus in the FX market.
The eternal restriction traps the profits of multinational companies, but it also pulverizes foreign direct investment. At the same time, it generates all the incentives for those who owe dollars to pay them back and not seek to ask for more money abroad. The lack of foreign investment and cross border loans condemn Argentina to lower growth and development of the capital market, which in turn generates a second round with a lower level of activity. Someone could argue that reducing external financing reduces the risks of sudden stops. But Argentine savers have enough sophistication to generate a “sudden stop” without foreign money. There is not much to gain there.
The corollary is that the BCRA’s reserve position may improve along the side of better terms of trade, as will probably occur this year, but that improvement will be short-lived if the FX spread continues to be high, generating all the wrong incentives. The agreement with the IMF returned to the political agenda. A new mission is coming and at least part of the government pushes an agreement before May. That deal takes a lot of work. Some voices point out that the Fund could be condescending to the fiscal plan and allow a convergence towards equilibrium that reaches 2025. It seems difficult, but we grant the benefit of the doubt. However, the discussion about a program will imply a monetary and exchange rate policy.
It seems unlikely to us that the IMF will buy a never-ending FX restriction, but at the same time it is also difficult to think that the authorities want to use trade dollars to ease the restrictions, close the FX spread and begin to walk the long road to recovering the credibility. For the Fund, the optimum is a devaluation prior to the program, exactly the opposite of what the government needs in an election year. With this set of incentives on the table, it is not obvious that from the instrumental point there may be an agreement for May.