Argentina edges ahead in devaluation race; capital controls next


Fernandez Buys Dollars in 'Draconian' Bid to Weaken Argentine Peso

By Drew Benson and Ben Bain
Bloomberg News
Sunday, September 26, 2010

Argentine President Cristina Fernandez de Kirchner's efforts to weaken the peso are working, while policy makers in emerging markets from Brazil to South Africa fail to curb currency rallies.

The peso has declined 0.8 percent in the past three months against the dollar, the only retreat among 25 emerging-market currencies tracked by Bloomberg. South Africa's rand gained 8.4 percent and Brazil's real rose 4.3 percent even as their central banks stepped up dollar purchases to stem the appreciation.

Argentine central bank President Mercedes Marco del Pont said Sept. 2 that the institution seeks to maintain a "competitive" exchange rate after dollar inflows climbed to a two-year high of $392 million in the second quarter, the second time since 2008 that flows were positive. The bank, which doesn't target a benchmark lending rate, buys dollars in the local foreign exchange market and limits appreciation by requiring investors deposit 30 percent of the funds brought into the country for one year.

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Argentina is "definitely bucking the trend because they're able to intervene aggressively," said Aryam Vazquez, an economist with Wells Fargo in New York. "It's a little bit more challenging for a country like Brazil, for example, which attracts a heavy amount of capital."

The dollar inflows followed Fernandez's completion of a $12.9 billion defaulted debt swap in June and after grain exporters began selling a record 55 million metric ton soybean harvest.

Argentina's peso dropped 0.2 percent on Sept. 24, the most in five weeks, to 3.9601 per dollar, extending its decline this year to 4.1 percent. The currency touched 3.9602 per dollar, the weakest level since its inception in 1992.

The central bank said in its daily e-mail statement that it last bought dollars on Sept. 23, when reserves reached a record $51.3 billion.

Fernandez last week nominated Marco del Pont, who backed the government's use of $6.6 billion in international reserves to pay debt this year, to remain in her post after it was set to expire Sept. 23. Economy Minister Amado Boudou presented lawmakers with a plan on Sept. 16 to tap another $7.5 billion in reserves to make debt payments next year.

Paying debt with reserves fuels inflation by freeing up budget money for other uses, said Claudio Loser, a former International Monetary Fund official, in a Sept. 22 interview. Consumer prices will rise 25 percent this year, more than double the official rate of 11.1 percent and the most in the world after Venezuela, former central bank President Alfonso Prat-Gayestimated in a Sept. 16 interview.

Brazil's increased dollar purchases have failed to halt the real's six-week advance, while South Africa has "no easy" solution to the rand's gain, the nation's central bank chief said Sept. 22.

Brazilian central bank President Henrique Meirelles stepped up dollar purchases to the highest in almost a year this month to temper gains in the real. The central bank bought $5.9 billion in the first 12 business days of September, Altamir Lopes, head of the bank's economic department, said Sept. 21. The purchases are the biggest for the period since October 2009, when policy makers bought $6.3 billion.

South Africa faces "hugely costly" options to stem the rand's gain as its 34 percent rally against the dollar this year curbs exports, Central Bank Governor Gill Marcus said Sept. 22.

Central banks in developed nations are also struggling as their currencies strengthen against the dollar. The Swiss National Bank lost 14 billion francs ($13 billion) in the first half of the year in currency intervention to stem the franc's rally. The franc has climbed 9.6 percent against the dollar in the second half and jumped to a record 97.8 centimes per dollar on Sept. 24.

The yen has recouped half its losses since Sept. 15, when Japan sold it for the first time since 2004 after the yen jumped to a 15-year high. The yen has climbed 10 percent against the dollar this year, the most among 16 major currencies tracked by Bloomberg.

Argentina's peso has weakened 28 percent since Fernandez's husband and predecessor, Nestor Kirchner, began his four-year term in May 2003, as each sought a weaker currency to bolster domestic industries and export revenue. In addition to requiring investors to deposit cash at the central bank, the government has also limited gains by maintaining caps on utility prices and taking over companies and private pension funds.

Foreign direct investment in Argentina totaled $4.9 billion in 2009, compared with $26 billion in Brazil and $17 billion in Chile, according to the United Nations Economic Commission for Latin America. Brazil is the largest economy in South America followed by Argentina, Venezuela, Colombia, and Chile, according to data compiled by Bloomberg.

Argentina has been "rational" in its use of reserves to make debt payments this year and won't sell bonds overseas at 8 percent or above, Fernandez said Sept. 24.

"Today rates are in the single digits, but we aren't interested in taking on debt that could be at 8 or 8.75 percent," Fernandez told reporters in New York.

An Argentina central bank official in Buenos Aires declined to comment and asked not to be identified by name in accordance with official policy.

Among other debt sales, Buenos Aires province officials met with investors in Europe and the U.S. last week about plans to sell about $500 million, according to a ministry official who declined to be identified because the terms haven't been completed.

Shareholders of Aeropuertos Argentinas 2000 SA, the country's main airport operator, earlier this month approved plans to sell as much as $300 million in bonds.

Five-year credit-default swaps tied to Argentine debt fell eight basis points to 762 at the end of last week. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

The extra yield investors demand to own Argentine bonds instead of U.S. Treasuries dropped 20 basis points, or 0.2 percentage point, to 680 last week, according to JPMorgan.

Warrants linked to growth in South America's second-biggest economy rose 0.02 cent to 11.8 cents, according to data compiled by Bloomberg.

Countries such as Brazil and Peru, which have "imposed some mild capital controls on short-term inflows," are less likely to turn to stronger limits, said Daniel Volberg, an economist with Morgan Stanley in New York.

Peruvian policy makers have raised reserve requirements four times since June as they seek to avert inflationary pressures and prevent foreign inflows from destabilizing the local currency.

"If they were to follow the footsteps of Argentina, they'd have to impose much more Draconian capital controls," Volberg said in a Sept. 24 telephone interview. "That would sort of prejudice FDI inflow and longer-term capital inflow, which would be sort of antithetical to the fundamental economic policy in those countries."

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