Monday, June 11, 2012

Fears of "pesoization" plague Argentina, as economy deteriorates

Faced with deteriorating economic conditions and signs of global isolation, Argentina's government has been pushing to suppress the nation's "dollar culture". The bulk of home sales in big cities are conducted in dollars. So are many commercial property transactions and event cement purchases, with the dollar still representing a legal tender in Argentina. The government wants to change all that. The so-called "pesoization" bills to require that all commercial transactions be executed in pesos have been circulated in Congress. To garner support for the "movement" to abandon the US dollar, President Kirchner announced that she will convert some of her personal dollar savings into a peso-denominated CD. She is also asking other senior government officials to do the same.

But Argentina's people and businesses are not buying it.
WSJ: - As of June 1, about $4.44 billion in foreign-currency deposits had left the banking system since President Cristina Kirchner imposed exchange controls on Oct. 31 to limit capital flight that was draining international reserves.

In May alone, jittery depositors withdrew about $1.41 billion.

Severe restrictions on dollar purchases by businesses and individuals have clearly spooked some Argentines who remember the forced conversion of their dollar savings into pesos during a deep economic crisis in 2002.

Indeed, Argentines view the dollar as a store of wealth and a transaction medium because of their country's long history of high inflation and profligate government spending that frequently ended in violent currency devaluations.
Exchange controls have sent a chill through the real estate market and fed a black market where dollar-hungry Argentines pay ARS5.90 per greenback.
That means people are willing to pay over 31% premium to the official exchange rate to purchase dollars. With capital leaving, the nation's economic conditions continue to deteriorate. Industrial production is falling and construction activity in particular has declined at a rate not seen since 2009.

Argentina's industrial production (YOY)

Argentina's construction activity (YOY)

Alberto Ramos from GS put it quite well:
GS: - The recent increase in the demand for USD developed as the macro underpinnings of the ARS have been weakening due to the current heterodox interventionist policy mix and deteriorating macro picture: entrenched high inflation (in excess of 20% since 2010), visible economic deceleration, eroding fiscal, trade and current account balances, and growing financial and FX repression measures to severely restrict access to USD.
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