Argentina Resolves to Punish Price Gougers

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By Ken Parks

BUENOS AIRES--Argentina on Wednesday resolved to punish price gougers as it tries to prevent a currency devaluation from further stoking the second-highest rate of inflation in the Americas after Venezuela, even as the peso came under fresh pressure in the market.

"The speculative behavior of many businessmen and merchants in Argentina is antipatriotic and shameful," said Jorge Capitanich, President Cristina Kirchner's cabinet chief. The government will use fines, store closures and imported goods to fight price increases, Mr. Capitanich said.

The rhetoric came amid the biggest challenge to Argentina's financial stability since its 2001-2002 economic crisis and default. The central bank allowed the peso, which is tightly regulated, to slide some 15% last week in an effort to help exporters and stop spending dwindling reserves defending the currency.

The move hasn't taken pressure off the peso. Shortly before the end of trading on Wednesday, the peso had gained slightly to 8.00 per dollar on the regulated foreign-exchange market, where the central bank has been regularly supporting the peso by selling dollars.

But on the black market, the peso weakened to about 12.90 per dollar from 12.30 Tuesday, according to newspaper El Cronista, which tracks black-market rates. That suggests a major problem for Argentine authorities: Even after the recent devaluation, many Argentines still see the official rate as too strong.

In the past three trading sessions, the peso has fallen from 11.80 to its current level at nearly 13 on the black market. So far this month, it has tumbled from 10 per dollar--a more than 20% slide.

A key factor in the currency's stability will be what happens to inflation, which the government says is just 10.9% a year, but which private-sector economists estimate at higher than 25%.

Businesses are in the government's cross hairs as the Kirchner administration tries to contain inflation through price controls on almost 200 basic goods ranging from food to condoms. The government is also in talks with 38 industrial sectors to limit price increases that officials say are nothing more than attempts by producers to make excessive profits at the expense of consumers.

The government struck a pricing agreement with the steel industry this week and hopes to do the same for construction materials like cement and bricks, Economy Minister Axel Kicillof said Tuesday.

Many economists, however, say the government needs to do more beyond strong-arming businesses to contain inflation. "The government needs an integral plan to lower inflation, and in this case it's doing it through price accords which on their own aren't enough," said Mario Sotuyo, an economist at consulting firm Economia y Regiones. "If it's not accompanied by monetary and fiscal policies, it's very hard to lower inflation just with [price] accords."

Companies are in a bind because price controls would limit their profitability, while at the same time they face significant wage demands from unions that doubt the government will be able to lower inflation, Mr. Sotuyo said.

At its weekly auction of short-term notes Tuesday, the central bank lifted interest rates to the highest level in more than a decade, seeking to head off the risk of Argentines pulling their money out of the banks to buy dollars as a hedge against inflation.

Rates on 98-day peso notes rose to almost 26%, from 20% just a week ago. The higher rates still leave savers at the mercy of inflation that many economists say is approaching 30% a year.

"The key test will be whether authorities raise the interest rate above 30% to push real rates into positive territory for the first time in 11 years," Daniel Volberg, an economist at Morgan Stanley, said in a video to clients.

The central bank also sold $19 million in dollar-denominated notes at yields between 2.5% and 4%. The government hopes those rates will be enough to convince Argentines to keep their dollars in the banks after it lifted an 18 month ban on the purchase of dollars for savings purposes this week. So far this week, the government has authorized dollar sales for about $100 million.

It is a high-risk strategy aimed at taking away business from a thriving black market for dollars by sacrificing scarce reserves. Some businesses are using the black-market exchange rate as a reference for pricing goods and services.

Last week, the central bank let the peso slide 15% against the dollar with a view to help exporters and to trim the gap between the official and black-market rates. It was the biggest drop in the peso since 2012 and a major political blow to a president who had long promised never to devalue.

Last week's the devaluation also spurred businesses to mark up prices on consumer goods ranging from computers to televisions, almost all of which are imported or assembled from imported parts.

Mr. Capitanich accused special interest groups of using the media to frighten the public by calling attention to a black-market exchange rate that is used by drug traffickers, money launders and tax cheats.

"No businessman can argue today that there isn't an exchange rate policy...that guarantees stability," he said.

Write to Ken Parks at ken.parks@wsj.com


  (END) Dow Jones Newswires
  01-29-141525ET
  Copyright (c) 2014 Dow Jones & Company, Inc.


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