Argentine central bank freezes banks’ FX purchases

BCRA order comes amid a falling peso, IMF talks and mid-term elections

The Central Bank of Argentina
Javier Pierini

The Central Bank of Argentina (BCRA) on November 4 ordered financial institutions to halt foreign exchange purchases through the end of November.

“Until the end of the month, financial institutions must keep their global foreign currency position at the same level as the monthly average of daily balances registered in October, or current as of today, whichever is lower,” the central bank said.

Argentine media attribute the decision in the first instance to the dollar’s growing strength on the black market. The unofficial rate, or dólar blue, approached 200 pesos to the dollar last week. The official rate is nearer 100 pesos to the dollar.

The dollar has risen 20% against the peso during 2021, and by 6.2% in October.

The central bank’s decision came one day after the Federal Reserve announced it would begin tapering its quantitative easing programme. Tighter monetary policy in the US tends to strengthen the dollar against emerging market currencies.

The BCRA regularly sells US dollars in the credit markets to bolster the peso’s value and provide sufficient dollar liquidity. The central bank’s foreign reserves declined by more than 7% in September, falling to slightly less than $43 billion.

Gale-force headwinds

The peso’s weakness, in turn, reflects monetary, macroeconomic and political developments, some of them chronic economic ailments. Argentina has suffered currency instability since the collapse of the peso’s 1:1 peg to the US dollar during the 2001–02 debt crisis.

During the presidency of Mauricio Macri, from 2015 to 2019, Argentine authorities lifted exchange controls. However, continued deficit spending, higher US interest rates and the lack of a credible monetary policy led the peso to collapse in early 2018. Macri had to seek an emergency IMF loan in May 2018; the fund approved a $50 billion standby agreement in June.

The IMF and Argentina are currently in talks concerning another fund programme for the country, and renegotiating its previous IMF debt. Negotiations have stalled as Argentina threatens to default on its 2018 loans, demanding that the fund lift a surcharge it levies on large funding packages.

Emilia Val, postdoctoral fellow and sociologist at the National University of San Martin, is not optimistic the BCRA will be able to halt the peso’s slide.

“From the markets there is a great deal of mistrust and scepticism towards the government in general and towards the restrictive measures around the dollar in particular,” she says. “Moreover we can add the uncertainty around the IMF agreement, which creates negative expectations in the financial world. I think the dynamic of the peso’s weakening will continue.”

Argentina also suffers from chronic high inflation. During the later years of her presidency (2007 to 2015), Cristina Férnandez de Kirchner was accused of politicising the national statistical service to conceal the inflation rate. The BCRA estimated year-on-year inflation in September at 52.5%.

The country continues to run a fiscal deficit. The primary fiscal deficit will be 4% this year, according to the government, though its 2022 budget projects a 3.3% funding gap.

The Peronist coalition resumed office in December 2019 under Alberto Fernández, with Férnandez de Kirchner as his vice-president.

In the political arena, Argentines will go to the polls on November 14 for midterm elections. Voters will choose nearly half of the lower house, and eight provinces will elect new senators. There will be provincial elections in eight provinces and the city of Buenos Aires.

In September’s primary election, the opposition Together for Change coalition won more than 41% of the vote, more than nine points ahead of the government coalition.

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