Argentina and Venezuela at their breaking point


Mexico City, February 10th.- Argentina and Venezuela have both been dishing out the proceeds of an unrepeatable commodities boom (oil in Venezuela; soya in Argentina). Both countries have been using a mix of central-bank interventions and administrative controls to keep overvalued exchange rates from falling and inflation from rising.


High inflation is a shared problem of both countries. Argentina’s official exchange rate is overvalued as a result, fetching 70% more dollars per peso than the informal “blue” rate in mid-January. Venezuela’s prices are rising faster still. Last year, the Central Bank stepped up money-printing to finance public spending, pushing inflation to 56.2%. A dollar fetches 75 to 80 bolívares on the black market, up to 7 times the official rate.


Both nations have dwindling arsenals with which to defend their overvalued currencies. Venezuela’s reserves of gold and foreign currency, which stood at nearly $30 billion at the end of 2012, were down to just over $21 billion by last week. Argentina’s reserves have also been tumbling.


The plan is doomed to failure unless the government becomes more open about its intentions and adopts a genuinely restrictive set of policies to battle inflation- Guido Sandleris, University Torcuato di Tella


Argentina announced a relaxation of the government’s ban on buying foreign currency for saving purposes. Argentines making over 7,200 pesos (USD$900) monthly are now able to change 20% of their salary into dollars at the official exchange rate so long as they get approval from AFIP, Argentina’s tax agency. The dollars are transferred to their bank accounts, not released in cash, and hit by a 20% fee if withdrawn before a year.


The government’s objective seems to be to close the gap between the official and blue exchange rates, alleviating the need to spend more of those precious reserves to prop up the official rate.


Venezuela, where the situation is even more perilous, is heading in the other direction. On January 22nd the government unveiled new rules under which a higher rate for non-essential transactions is set weekly (it stood at 11.36 bolivares to the dollar this week). The old rate of 6.3 bolivares to the dollar still applies for government imports and basic items such as food and medicine, so reserves will keep falling as the government defends the currency.


Venezuela is running out of dollars to pay its bills. Although payments to its financial creditors of around $5 billion this year do not appear to be at risk, the country’s arrears on non-financial debt are put at over ten times that sum. These include more than $3 billion owed to foreign airlines for tickets sold in bolivares, and around $9 billion in private-sector imports that have not been paid for because of the dollar shortage.


Foreign airlines have placed tight restrictions on ticket sales; some have suspended them altogether. Many drugs and spare parts for medical equipment are unavailable. Car parts, including batteries, are increasingly hard to find; newspapers are closing for lack of paper. The country’s largest private firm, Empresas Polar, which makes many basic foodstuffs, is struggling to make some products.

The Venezuelan government blames the crisis on private businesses and “irresponsible” use of hard currency by ordinary Venezuelans. It has ordered drastic cuts in dollar allowances for travellers, especially to popular destinations like Miami. Remittances to relatives abroad have also been slashed. In a bid to curb runaway inflation, it has introduced a new law restricting companies’ profits to 30% of costs under penalty of jail.


Without a big injection of dollars from Petróleos de Venezuela, which brings in 96% of foreign earnings, the crunch will continue. Unless the government abandons its antipathy to private capital, the prospect of new investment is dim. At least in Argentina, the partial liberalisation of currency controls is a halting step towards normality. 



Fuente: The Economist

Mexican Business Web via The Economist


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