Authorities double down on currency controls

Authorities double down on currency controls

Event - Regulatory bodies in Argentina have tightened the current system of draconian exchange controls further in a bid to stem an ongoing drain of foreign reserves. These measures will not curb local demand for hard currency, but they will drive up the black-market premium for US dollars.

On October 5th the Comisión Nacional de Valores (CNV, the securities regulator) introduced regulations on transactions made in the Contado con Liquidación (CCL, the blue-chip swap market) and the Mercado Electrónico de Pagos (MEP, the electronic payment market). Both platforms allow investors to purchase assets in pesos and sell them in dollars, thereby acting as parallel currency markets.

The new rules impose a weekly cap of 50,000 units (equivalent to US$18,000) on the sale of local-law, dollar‐denominated bonds in the CCL and MEP. The rules also prevent investors from engaging in blue-chip swap operations 30 days before and after they sell local-law bonds in the CCL market.

Concurrently, the Banco Central de la República Argentina (BCRA, the central bank) rolled out a measure that temporarily prevents businesses from making advance payments for goods imports. In recent months the gap between payments for imports and the value of goods dispatched has been growing, as many importers have sought to make the most of the relatively cheap official exchange rate. The measure expires on October 31st but is likely to be extended.

The main reason behind the tightening of the already draconian currency framework is the BCRA's increasingly tenuous foreign-reserves position. Since mid-year the BCRA has been forced to draw down heavily on its reserves to sustain its interventions in both official and parallel currency markets. Although gross reserves stand at US$43bn, net liquid reserves (which exclude currency swaps, reserve requirements on dollar deposits, gold reserves and IMF special drawing rights) are lower, at just US$5bn.

In our view, the new controls will provide little respite to the reserves position. With both savers and investors growing wary about policy direction under the government led by the president, Alberto Fernández, portfolio dollarisation is likely to persist. Consequently, demand for US dollars will probably move from the CCL and MEP markets to the over‐the‐counter (OTC) market, which is harder to regulate.

Impact on the forecast
Currency risk will remain extremely high until the government signs a new IMF deal that provides fresh finance and instils confidence in policy. Despite risks to the outlook, we still expect a deal to materialise in early 2022.