Tag Archives: Argentina

Argentina – will capital controls work?

Last week Argentina imposed currency controls on business to prevent money leaving the economy after the Argentinian Peso lost over 25% of its value since elections last month – see graphic. The central bank now require that:

  • exporters to repatriate earnings within 5 to 15 days
  • businesses will need permission to repatriate profits abroad or buy US dollars
  • residents are restricted to foreign exchange purchase of US$10,000 and non-residents US$1,000

With a track record of hyperinflation and financial crises, Argentinians are quick to sell their Pesos for US$ to maintain store value – with inflation and turmoil in an economy the local currency has less purchasing power. It is important for the Argentina government to restrict the demand for US$ and improve its ability to pay its significant debt – US$101bn. Capital controls have the aim of protecting the stability of the Peso and savers.

Will it work?

Although capital controls do stabilise the currency in a panic situation, they will only work in the long-term if they are used to confront the underlying macroeconomic problems in the economy itself. However, with Argentina’s inflationary issues coupled with fiscal deficits, capital controls are a band aid solution to the macroeconomic problems. Below is a very good video from the FT giving a background to the problems in Argentina.

Inflation in Argentina – Printing money doesn’t work

Here is a clip from Nial Ferguson’s Ascent of Money that I used in my AS class today. It explains the hyperinflation problem that Argentina experienced in the late 1980’s – early 1990’s and reminds us of the dangers of inflation. Anyone who thinks that you can solve a financial crisis by printing money might be interested in the Argentinian experience.

Lies, Damned Lies, and “Argentinian Inflation” Statistics

Share prices and bond markets are moved by variables including market indicators and statistics on interest rates, inflation and unemployment. The variables are important in other ways, too. Interest rates affect mortgages, inflation harms those on fixed incomes and rising unemployment breeds job insecurity. Yet do many of us really understand how the figures are calculated? Do we really know how to interpret them? If we don’t, should we strive to know more?

We certainly should. Many commentators make a good living out of describing and interpreting statistics. Often their comments are commonplace and uninteresting.The pundit industry would collapse if we all knew more about these numbers and could judge them for ourselves. Interpreting market indicators is a minefield. Many indicators are official statistics that relate to economic performance. Although official statistics are usually honestly compiled, their accuracy varies.

While you can generally trust data published by, for example, Statistics New Zealand, you need to be aware of the limitations of the numbers. Take the consumer price index, a measure of “inflation”. Many commentators attach much greater significance to CPI figures than they deserve. The change in CPI from one month to the next may not be highly significant. It may be influenced by unusual factors that only applied in that month. Deducing a trend from one month’s figures can be dangerous. Statistics can also be adjusted and manipulated. Sometimes the adjustments are helpful. In the case of the CPI, for example, seasonal adjustments can be made. These reduce or eliminate the effect of items that vary sharply in price at different times of the year. They smooth out the figures, giving a better view of a trend. A moving average of several months’ figures may give a better view of an underlying trend. But neither of these is a panacea when it comes to interpreting the numbers. The less scrupulous might “annualise” one month’s or one quarter’s figures. But annualising can cause problems. If this month’s figures are sharply at variance with last month’s, then drawing conclusions from the annualised figure could be misleading.

Argentina’s Inflation Rate

For the last few years the Argentinian government has published inflation figures that a lot of people find hard to believe. Expansionary fiscal and monetary policy has caused the economy to grow too quickly which eventually led to higher prices. In order to conceal the higher inflation rates the government resorted to price controls and tampering with the official figures. Some employees of the statistics institute, INDEC, were told to omit decimal points, not round them. According to The Economist, although this doesn’t seem much, when you do the calculations you get the following:

1% monthly rise in the CPI = 12.7% annual rise
1.9% monthly rise in the CPI = 25.3% annual rise

Unions in Argentina use independent statisticians when negotiating pay increases. Surveys from a university show inflation expectations running at 25-30%. When you compare the official (Government) and the unofficial (PriceStats – private provider of inflation rates) you get the following (see also chart from The Economist):

Unofficial annual rate – 24.4% and cumulative inflation since the beginning of 2007 at 137%
Unofficial annual rate – 9.7% and cumulative inflation since the beginning of 2007 at 44%

Confidence in the present government’s economic policy has taken a hit and it will have to earn back the trust of not only its people but also the global community.