Argentina's New Fiscal Policies

article from November 18, 2011

By Jamie Douglas

Since Cristina Fernández de Kirchner’s sweeping landslide reelection on Oct 23, mainly because of a fractured opposition that failed to form a coalition to oppose her, there have been a number of new regulations dealing with foreign exchange. All foreign mining and energy companies will henceforth be unable to repatriate their income, and the private exchange houses are restricted to buying dollars, being prohibited from selling them.

On Wednesday, Oct 26, the Official Gazette published Special Decree 1722, ordering all revenues created by the mining and energy sectors in Argentina to be negotiated at the local foreign exchange market, a measure aimed to stem capital flight, as well as a forced attempt to flood the market with “fresh” dollars to control the high demand for the US currency by everyone in the country. The measure also aims to control the inflation that is being denied by the Casa Rosada.

Government “economists” mistakenly believe that the funds that the foreign corporations are being forced to retain in Argentina will inject US$3-$4 billion into the economy. I do not make the connection here. How would that money enter the local market? Foreign corporations are unlikely to invest in infrastructure improvements as long as they are unable to take their income home.

By Friday, Oct 28, the central bank had begun to regulate the ability of just about everyone to sell their soon-to-be worthless Argentine pesos for US dollars, in order to stop the capital flight of US$100 million per week, or $3 billion per month. The new decrees are a complete mess of rules and regulations requiring potential moneychangers to submit their requests to the tax authorities, who will check the amount against their records of how much money has been declared, and they are sure to work their way up to the supreme court in about 10 years time.

The incoming vice president of the nation, current Economy Minister Amando Boudou, assured his fellow Argentineans on Monday, Oct 31, that the new rules are not meant to hinder transactions, but are intended to show the origin of the monies. He assured the patient that everything is fine and all is in order. That would be a first in the 201 year history of Argentina!

The vice president-elect is also urging Latin American nations to abandon the use of the US dollar altogether and start using local currencies, instead. That is in direct contradiction to an inquiry made by the Uruguayan government and several banks from Uruguay urging the Argentinean central bank to guarantee that it will buy back the hundreds of millions of pesos that Argentine tourists will spend in Uruguay during the vacation season. Many porteños cross the Rio de la Plata with sacks of Argentine pesos, which they exchange at Uruguayan casas de cambio, where the dollar now exchanges at almost 6 pesos, nearly a 50% premium for the Argentines. But the banks and exchange houses in Uruguay are understandably reluctant to buy Argentinean pesos, since there is now no way to turn them back into dollars.

Argentina’s unilateral panic rules are, of course, having repercussions internationally with investment bankers, rating agencies, the IMF and the World Bank, all of whom warned the government of La Cristina of the dire consequences of these actions. The ratings agency Fitch has advised the Argentinean central bank that the nation’s credit rating could become subject to highly undesirable changes in currency exchange policies driven by the high inflation rate that the government is denying.

Jamie Douglas

San Rafael, Mendoza

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