Argentina Throws Dollar Lifeline to Top 20% After Peso Falls

Argentina’s effort to stem a financial crisis by loosening controls on dollar purchases will only help the wealthiest Argentines protect themselves against surging inflation and a plunging peso.

The government today authorized foreign currency purchases for people earning a monthly wage of at least 7,200 pesos ($899) with a limit of $2,000 a month. About 80 percent of the country’s 14.8 million workers, earned less than 7,000 pesos in the third quarter of last year, according to the national statistics agency’s website. For people who do qualify, the tax agency known as Afip, will allow them to buy as much as 20 percent of their average monthly salary in the past year.

“It provides a route in which the upper 20 percent of income distribution can hedge themselves against inflation and the effects of a falling currency,” said Neil Shearing, the chief emerging markets economist at Capital Economics Ltd. “It’s going to be a very gradual roll back of currency controls. They have to allow greater exchange rate flexibility alongside capital account liberalization otherwise they will just drain their foreign exchange reserves further.”

President Cristina Fernandez de Kirchner is rolling back some of the controls she imposed since re-election in 2011 as restrictions to buy dollars have failed to contain an $18.7 billion drop in reserves while investment shrivels and the peso plummets. Argentina devalued its currency 15 percent last week, the biggest drop since 2002, a move that may cause inflation, already estimated at 28 percent, to accelerate.

Intended Beneficiaries

Economy Minister Axel Kicillof said in an interview with Buenos Aires-based newspaper Pagina12 yesterday that the easing of controls would be for the poorest Argentines to obtain dollars for savings.

“The mechanism will be aimed at benefiting those who have the least,” Kicillof said, according to Pagina12. “The measures will impede those who have the most from taking all the dollars.”

Jesica Rey, a spokeswoman at the economy ministry, said Kicillof wasn’t immediately available to comment on who would benefit from the new regulations.

Argentine dollar-denominated bonds sank to a four-month low today as Moody’s Investors Service said the steepest devaluation of the peso in 12 years hasn’t helped improve credit quality.

Bonds Tumble

International bonds due in 2017 fell for a fourth day, declining 1.78 cents on the dollar to 78.85 cents, the lowest on a closing basis since Sept. 17, pushing yields up 0.83 percentage points to 17.34 percent. The securities have lost 6.7 cents since Argentina began devaluing its currency Jan. 22, which spurred an average loss of 7.8 percent for Argentine dollar bonds in JPMorgan Chase & Co. indexes.

The peso closed unchanged at 8.0031 per dollar in Buenos Aires, the first time the rate hasn’t weakened since Jan. 15.

Argentines who can’t access dollars at the official rate or through the new regulations today paid as much as 12.20 pesos per greenback in a black market, 4.1 percent more than on Jan. 24, according to Ambito.com, which tracks the rate.

Some stores moved to raise prices after the devaluation last week by as much as 30 percent on appliances, electronics, wine and other goods that aren’t regulated by the government, while supermarkets seemed to abide by food-price accords reached earlier this month.

Inflation Expectations

Cabinet Chief Jorge Capitanich said the government is monitoring prices to prevent abuse. Household appliances, cars, electronics and other goods with a percentage of imported parts will be subject to a permanent monitoring, he said.

Consumer prices had risen 3 percent in January before the devaluation, and inflation will quicken to more than 30 percent this year, according to Lorenzo Sigaut, the head economist at the Ecolatina research company in Buenos Aires.

“This surprised us all and creates serious uncertainty since you don’t know where the exchange rate is going,” Sigaut said in a telephone interview. “This is a government that continues to deny inflationary problems but now has to win the battle of expectations.”

Economy Minister Kicillof said yesterday the peso has now reached an “acceptable level” at about 8 per dollar, a signal the central bank may continue to spend reserves to keep the rate in check. The bank sold $380 million in the official currency market to defend the price of the peso, dropping reserves to a seven-year low of $29.1 billion.

To contact the reporters on this story: John Quigley in Lima at jquigley8@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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