Bad News in Argentina’s Currency Black Market
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In May, an old feature of macroeconomic instability returned to Argentina’s cities: black market currency trading. In the last few months, the peso has dropped precipitously on the black market while the government makes tiny adjustments to an increasingly fictitious official dollar-peso rate. The government’s exchange rate policies have already gouged export-oriented businesses and portend bad news for Argentina’s macroeconomic health.
The Resurgence of Blue Dollars
The official exchange rate stands at 4.59 pesos per dollar. The official rate has been ticking up on paper, with the peso depreciating against the dollar by a couple percentage points each month. However, few Argentinians can actually buy dollars at the official rate and the government is actively closing avenues to dollars by prohibiting some types of swaps and limiting capital transfers. At banks and exchange houses, Argentines and foreigners can sell but not buy dollars at the official exchange rate. The exception – Argentines can buy dollars if they are traveling abroad – is becoming more difficult; Argentines must now submit more paperwork and the central bank may only allow approved applicants to buy a few hundred dollars. Cue the black market.
Currency houses, unlicensed street traders, sweet shops, and hotels have all started buying and selling “blue dollars,” or dollars at a parallel rate. The peso has fallen as Argentina’s economic fundamentals falter – 25% annual inflation, rising unemployment, slowing growth – but poorly-managed currency controls have caused the peso to depreciate on the black market at alarming rates. In May, blue dollars traded at five pesos, just enough above the official rate to give the unemployed an incentive to trade currency on the street. In June, the blue dollar passed six pesos and at the end of July, it reached seven. In tourist districts, shops of all types now have hand-written signs in the windows, offering to buy dollars at parallel rates.
Bad News for Exporters, Bad News for Everyone
Inflation and stagnant growth hit businesses hard, and a parallel currency market only makes things worse. Exporters, particularly in the manufacturing and agricultural sectors, have seen costs rise drastically in the last six months. Foreign currency earnings at the official exchange rate cannot cover the increase and raising prices reduces competitiveness; the Financial Times recently published an article on how these policies and conditions have wrought havoc among vintners.
Publicly-traded companies with subsidiaries in Argentina such as Chilean energy company Enersis (NYSE: ENI), energy company Pampa Energia (NYSE: PAM), and Brazilian oil giant Petrobras (NYSE: PBR) have seen costs soar and profits slump at Argentinian operations. The stocks of these resource-extracting companies have been battered by a combination of rising political concerns after President Kirchner’s nationalization of the largest oil installation, falling prices, and steeply higher costs. Similarly, shares of bank BBVA Banco Frances (NYSE: BFR) have slumped this year on slow growth and high inflation, combined with government steps to up regulation while pressuring the banking sector to make cheap loans. The broader Global X FTSE Argentina 20, an ETF that tracks Argetina's main index, has fallen more than 40% since the beginning of the year.
While exporters are hurting most now, the rise of a parallel currency market is bad news for everyone with stakes in the Argentine economy. The rates must be reconciled at some point – the Central Bank is already low on dollars – and the bigger the gap between the official rate and the parallel rate, the more painful the eventual devaluation.
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