Give an Inch for Dollar Savings, Argentineans Run a Mile from Pesos

The central bank's reserves may reach new dangerous lows in 2015 if the Kirchner administration pursues the saving in dollars strategy to keep the black market at bay.
The central bank’s reserves may reach new dangerous lows in 2015 if the Kirchner administration pursues the saving in dollars strategy to keep the black market at bay. (Pixabay)


It’s been almost a year since Argentina’s federal government allowed the purchase of US dollars for saving purposes, to prevent a further rise in the black-market dollar price. That’s why, among other reasons, the underground “blue dollar” didn’t reach the heights previously forecasted.

Thanks to the Cristina Kirchner administration’s devaluation of the national currency, the official dollar rate depreciated 7 percent between January 2013 and December 30, 2014. During the same period, the blue dollar dropped by 5.7 percent. By this I don’t mean that the dollar for savings purposes stopped the underground dollar’s increase, but it did contribute.

However, this course has a cost for the government: weaker centra-bank reserves, despite all the accounting gimmicks to show otherwise.

Argentineans started buying dollars for savings purposes more eagerly in September, climaxing in October, although November and December did not lag behind in demand. Last year, the government sold almost US$3 billion for savings purposes, not a negligible figure considering their $31.4 billion in reserves by the end of 2014. Therefore, the cost of implementing this measure represented around 9.4 percent of the country’s reserves.

Dollars for saving as percentage of central bank reserves.
Dollars for savings purposes as a percentage of central bank reserves. (Iván Cachanosky)

This becomes worse when you take into account that the reserves are actually at a much lower lever than reported by the Argentinean Central Bank. To get a clearer picture of true cash reserves, one must subtract assets. First of all, deposits in private and government banks make up 38.8 percent of the reserves — $12.2 billion, of which $4.13 billion, up to December 31, 2014, is government deposits.

Then, one needs to discount multilateral debt ($1.7 billion) and the central bank deposit certificates ($380 million). This last figure may not amount to much, but it doesn’t end there. Hidden in the reserves’ official figures are some $5 billion of advances for imports and $1.5 billion made by grain producers. If you take all this into account, the real cash reserves are approximately $10.6 billion.

Argentina's Central Bank real cash reserves
Argentina’s Central Bank real cash reserves. (Iván Cachanosky)

The government’s dollars for savings purposes are actually costing us then 28.2 percent of our cash reserves. Squandering reserves doesn’t seem like the most advisable strategy to contain the black-market dollar, and it will only delay the inevitable. Argentina has already experimented with currency controls and the story always ends the same: sooner or later the official rate catches up to the black-market rate, because the latter is what more accurately signals the real market price.

If the current administration is worried about the increasing gap between the two rates, it should target inflation instead of cracking down on informal private exchanges, or cuevas. An exchange rate is nothing more than the relationship between two currencies; in this case between the Argentinean peso and the US dollar. The blue dollar gained value in 2014, not because the US dollar became more valuable, but because of the peso’s devaluation. In other words, what makes the black-market rate greater is the inflation that eats away at the Argentinean peso.

The reserves can achieve dangerous news lows this year if the government keeps pursuing this strategy. Unofficial estimates predict Argentineans will demand around $5 billion for saving purposes in 2015, half of our actual cash reserves.

Given the absence of a plan to increase the central bank’s reserves, another year with similar demand will leave Argentina without any extra cash. The Kirchner administration’s only way out seems to be betting on a favorable outcome in the Chinese swap deal. Needless to say, this is not a sustainable strategy. Even if it were, it would be far better if Argentina could generate its own capital inflow without depending on another country’s financial lifeline.

Translated by Daniel Duarte. Edited by Guillermo Jimenez and Fergus Hodgson.

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