By Dow Jones Business News,
February 10, 2014, 07:51:00 PM EDT
By Shane Romig
BUENOS AIRES--Argentine officials managed to stem the bleeding of foreign reserves and push the value of the
beleaguered peso up slightly in recent days by raising interest rates and slashing dollar holdings at banks.
The trend, though, is expected to be short-lived, economists said Monday, unless President Cristina Kirchner
undertakes painful reforms to correct Argentina's distorted economy. The central problem is a stubborn lack of
confidence in the peso, which had lost 19 % of its value in January as Argentines sought to buy dollars.
"People are a bit less anxious now, though there is still a degree of skepticism about how sustainable this
situation is," said Daniel Marx, a former finance secretary who runs Quantum Finanzas, a Buenos Aires consulting firm.
On the official government market, the peso strengthened Monday to 7.8 pesos to the dollar after starting the month
at just above 8 pesos. But that comes after last month's dramatic slide, which had raised the specter of financial
crisis in South America's second-largest economy. Officials were forced to devalue, which hurts the poor most and
amounted to an abrupt about-face for Mrs. Kirchner's populist government.
The black-market exchange rate also favored the peso on Monday, with the dollar slipping to 11.55 pesos after
touching 13 pesos late last month. The government even managed to slow the drain of reserves from the central bank. The
bank had bled nearly $1 billion in the last week of January, but on Friday it had gained $19 million.
Still, the trends were worrisome to economists. Reserves on Monday dropped by $83 million, leaving the central bank
with $27.7 billion. That compares with a high point of $52.6 billion in January 2011.
Daniel Artana, chief economist at the Foundation for Latin American Economic Research in Buenos Aires, said the
government is simply gaining some time. If large-scale, fundamental reforms aren't put in place--on everything from
swelling deficits fueled by the printing of money to huge outlays for energy and transportation subsidies--then "in
weeks or maybe months, we're going to be discussing the same problems again," Mr. Arana said.
International credit markets have been closed to Argentina since its $100 billion default in 2001, leaving foreign
reserves as one of the few sources of hard currency available. The government has regularly tapped those reserves to
make foreign debt payments, buy imported fuel and fund government spending on myriad social programs that have benefited
Mrs. Kirchner's base of support.
The decline in those reserves is stoking concern over the government's ability to meet its obligations.
Last week, the government put a 30% limit on private bank foreign currency holdings, curtailed dollar purchase by
importers and put pressure on grain exporters to bring in dollars.
"These financial-repression measures are just a short-term palliative fix for the steady drain of reserves," said
Alberto Ramos, a Goldman Sachs economist in New York. "In fact, they may even be counterproductive as they show the
authorities are not yet ready to embrace a serious policy shift."
Argentina suffers from the second-highest inflation rate in Latin America behind Venezuela, with prices rising at
an annual rate of about 28%, according to independent forecasts. Economists are also predicting that inflation is on
pace to top 40% this year.
The central bank has raised interest rates over the past two weeks, with peso-denominated 70- and 91-day Treasury
bills paying almost 29%. While high, those interest rates still aren't considered enough to overcome the country's
excessive inflation, according to a recent report by Morgan Stanley.
Meanwhile, a 30% limit on foreign currency holdings by banks has forced them to sell $1.1 billion dollars to the
government. They also have been selling dollar-denominated bonds to meet the new requirements. Estimates of how much the
banks will have to sell to comply with the government regulations vary from $1.5 billion to $5 billion.
In its bid to collect more dollars, the government is also pressuring farmers to sell the remaining grain they have
been stockpiling in silos. Farmers are hesitant to sell because holding out as long as possible acts as a hedge against
inflation and the depreciating peso.
On Friday, Mrs. Kirchner's cabinet chief, Jorge Capitanich, said that grain exporters, including soybean farmers,
had assured him that about $2 billion would come in from shipments this month. In addition, some relief is expected in
March, when the current soybean crop makes its way to market, the government has said.
Soybeans, the country's top source of foreign currency, are expected to generate $29 billion in revenue over the
Taos Turner contributed to this article
Write to Shane Romig at email@example.com
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