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ECONOMY | 26-09-2020 08:45

Miguel Pesce: ‘A dollar at 130 pesos would inflict unbearable levels of poverty’

Following a week of difficult announcements, Central Bank chief Miguel Pesce sits down for a feature-length interview to explain the government’s logic in what he describes as “very arduous situation, aggravated by the action of speculators.” Nevertheless, Pesce remains optimistic over 2021 growth, lower inflation and export possibilities.

Is it true that President Alberto Fernández did not want to tighten the exchange restrictions and that you had to convince him of the need to do so? 

Nobody wants to tighten the exchange restrictions. It’s a need and we were already talking about the buildup to that decision in our last interview [back in January, available to read at https://bit.ly/3cdKStA]. 

In 2011 Argentina exported US$83 billion and now we’re exporting around US$60 billion. Ours is a competitive exchange rate with no need to devalue and the way to avoid an unnecessary devaluation is to establish certain restrictions. There were discussions as to what form those restrictions should take and a consensus was reached, we’re all agreed. 

 

Is it true that Economy Minister Martín Guzmán wanted to postpone the restrictions? 

No, the timing was defined jointly, following the conclusion of the debt bond swap and together with the announcement of the 2021 Budget. That was also a matter of common agreement.

 

Last week it was maintained that with the bond swap a done deal, the Central Bank would have the tools for intervening and avoiding new restrictions. 

What happens is that we needed to bring transparency to a pretty opaque market whereby the dollar exchange rate was determined by share prices – [in Spanish] contado con liquidación and MEP (Medio Electrónico de Pago). We advanced working jointly with our Securities & Exchange Commission [CNV, in its Spanish acronym], excluding from that demand those speculative funds which entered in previous years to buy shares under Argentine law, coming to form half the demand in that market. We’ll see how that market performs, what kind of exchange rate references it generates and then we’ll evaluate whether Central Bank intervention is necessary. 

 

They say that you showed the president projections to convince him that these restrictions were necessary. 

The president is well-informed, in touch with reality and knowing Argentine history so no explanation in particular was necessary. The president follows what is happening on the exchange market.

 

It’s also said that among the differing positions [AFIP tax bureau head] Mercedes Marcó del Pont and [Deputy Cabinet Chief] Cecilia Todesca supported you the most.

I was not referring to whether there were differences or who thought one thing or the other. It seems to me that it does not help governance to talk about those things. The important thing was to arrive at a strategy by consensus and to push it through.

 

Would it have been better to have taken this decision earlier? 

The previous government should have taken it when they applied the first restriction, perhaps as early as April, 2018. If they had done so, we would have the US$44 billion of the International Monetary Fund standby as reserves today.

 

Should this government have acted earlier? 

The questions of timing have to do with restructuring the debt since the decisions taken involve the bond market. Not worth making noise there. The decision was taken with a lot of technical work to avoid any possible interpretation that the government was restricting circulation for foreign bondholders. The latter can have their bonds in Argentina or abroad, sell them in pesos here or in dollars abroad. The only thing we’re saying is that they cannot sell them in dollars on the local market, that was a correct CNV decision. The ALYC [agente de liquidación y compensación integral] stockbrokers, as we call them now, can only operate on institutionalised Argentine markets, not abroad as they’ve presumably been doing.

 

Did you have to wait for the bond swap of public debt in private hands to be resolved before doing anything else and if so, would you like it to have been resolved earlier? 

It was a complex process. In 2002 it was my job to restructure the Tango Bond for the City of Buenos Aires. We had to hold three assemblies before obtaining the number of votes we needed. So I already knew that it was a complex process which would take time. It seems to me that it was done in the least time possible. 

 

But it was almost promised that once the problem of the public debt with the private bondholders had been resolved, the exchange markets would calm down.

It undoubtedly contributed to clearing the government’s fiscal situation, the balance of payments and the exchange markets. We always said that it was fundamental for Argentina to export more. We came from years of slumping production, to which was added the  pandemic. The country needs US$60 billion just for imports and we only export US$60 billion. That’s not enough for all the rest – for example, to service debt for the productive companies based here... [Settling the debt] was indispensable but we always said that something more was needed and that something more is to export. 

 

The 20121 Budget posits that imports will grow more than exports. 

We’re at very low levels of imports. I think there’ll still be a trade surplus next year. Imports will grow more because they fell more than exports this year. We’re hoping for new soy records. In December, 2017, it fetched US$345 and today is topping US$380 on Asian markets. We hope that trend continues. The information we have is that there are major purchase orders from Chinese importers for soy and other grains, thus opening the way for hopes that exports will perform better than the assumptions of the budget data. 

 

The president had mentioned the possibility of restricting the dollar for private savers some weeks ago although he then went back on his words. Private bankers like Jorge Brito also asked that the savings dollar be eliminated. What do you think of it now? 

That we also discussed in our previous interview. We have two structural questions to resolve. When people talk about structural questions, they often refer to pensions but these two are essential. One is that we have to export US$90 billion and the other is that we have to have capital markets to absorb Argentine savings. It’s not true that we Argentines have no capacity to save. We need overseas investment because it brings in innovative technology and makes our economy more competitive but we need our capital markets. 

In the best year of the market-friendly government, 2017, capital flight amounted to US$16 billion and then it was US$19 billion and then US$23 billion. Capital markets which can absorb the savings capacity of Argentines are the first step prior to resolving the problem of dollarisation. We cannot emerge from that trap if we do not offer the average, or even small, saver options on capital markets, as everywhere in the world, especially when people save up for their old age and we do not offer them instruments or debt for companies or shares which pay dividends. We’ve made an effort, as has the CNV, doubling the placements on capital markets this year from 2019. From the beginning of this administration we’ve established index-linked fixed-term deposits giving one percent on top of inflation, as well as an interest rate floor of 30 percent for all companies and persons making fixed-term deposits, which we later increased to 33 percent for all persons depositing less than a million pesos to leave no doubts as to a real positive interest rate. Those are efforts made which we offered people. But there’s a cultural track record whereby Argentines always make money with the dollar or real estate. Our commitment is to reverse that trend.

 

So Argentina has a considerable capacity to save, but only in dollars. 

That’s right. 

 

But isn’t an important percentage of what we call “capital flight” savings?

There are US$170 billion in banknotes distributed across Argentine territory. That’s an enormous sum. Would that we could convert those savings into investments into Argentina – it would change this country’s history. That’s an objective we should all share.

 

That word “flight” has illegal connotations, when saving is really a virtue. 

That name was tagged when big business was behind the flight. Later the phenomenon spread. Virtue would be when those savings are converted into investments in our country – that’s the structural change we have to reach. 

 

You said: “We believe that this increasing gap [between the official and parallel exchange rates] has come from the uncertainty produced by the process of restructuring the foreign debt and we believe that once the renegotiation has been successfully concluded and the old bonds swapped for new, that will send a positive signal to close the gap.” 

What happened? Is there an endemic problem of confidence? 

We have a problem of momentum. The markets work on the basis of trial and error, needing to approximate balance to be efficient. When they are off-balance, they destroy capital like crazy and start guestimating [sic] prices. That happened in 2002. Proceeding from peso-dollar parity, we reached an exchange rate of 4.20 pesos which the Central Bank had to stop short at 2.80 when it kept on going down. In a dollarised economy this brings about a major distortion because prices start becoming fixed around the exchange rate ceiling. There’s the momentum. Because the markets function on the basis of trial and error, the public sector has to make the decisions in some cases. 

 

It’s true that the official exchange rate is competitively priced based on an annual average but it’s well below the wildest moments such as, precisely, 2002 or 1989, another example with other antecedents previously. Aren’t we risking a similar situation with the loss of confidence generated by the pandemic plus an accumulated economic crisis making the market think that the dollar should not be at its historical average but reflecting the moments when liquidity was lacking? 

We Argentines have a problem of expectations. When they see complex situations, they buy dollars. It’s always happened. We believe that viewpoint to be erroneous in this particular circumstance. But we also have speculators. Half the demand for dollars on the contado con liquidación market came from overseas funds entering for the carry trade between 2017 and 2019 – that half representing a monthly US$450 million. If you don’t take that speculative component away from the market, they cause your exchange rate to go all over the place. Argentina does not need the kind of exchange rate which an overseas fund is prepared to pay after buying shares under Argentine law. The country needs a competitive exchange rate which is also favourable in terms of not generating situations of poverty or sharply lowering real wages. Apart from the odd exception, we do not find colleagues who recommend a lagging exchange rate. If we exclude these speculative strategies, we can arrive at a reasonable exchange rate with reference parities closer to the official.

 

It should be added that the need to save to face future problems is greater during the pandemic because people are scared – not just in Argentina, in all the world, but in Argentina they save in dollars. 

Consumer behaviour has also changed. People who managed to maintain their incomes because they work for the state or for a company without difficulties in this context are now saving more than they saved before but most people are not. Yet it is surprising in this context there are people with the capacity to buy a monthly US$800 million.

 

Which of the exchange rate measures taken last week is the most important? 

It’s very important that we made the share market operating in both currencies more transparent. That seems to me a structural contribution to that market. That wasn’t us, it was the CNV. 

 

There had been talk of the problem of the dollar for private savers but not the need to reprogramme the debt of private companies.

We were successful in terms of lowering interest rates, sustaining an interest rate for fixed-term deposits in accordance with the levels of inflation and devaluation, as well as a very important interest rate reduction for companies. Today PyMEs [small and medium-sized companies] can discount a cheque at 23 percent on average in capital markets and banks. Argentine companies are able to place negotiable bonds on the local market at the dollar link with no extra interest rate charge. When they were seeking external financing during the previous government, the interest rate obtained was 10-12 percent. The companies spotted this opportunity and began to take debt on the local market, not to expand their production nor to create new jobs but to substitute their debts abroad. We told the companies that the next half-year will be complex because Argentine exports are highly seasonal. We’re telling them to reprogramme their debt payments abroad under the same conditions as some companies, especially in the oil and services sectors, have already done. We’re trying to save that situation. 

 

Are you suggesting that there were companies who took credits in pesos at negative or zero interest rates in order to cancel dollar debts which could have been renewed? 

Sure, they were cancelling their not inconsiderable debts contracted abroad. We were always talking about the increase in public-sector debt in the last years of the previous government but between 2015 and 2019 private debt increased by 84 percent, by US$20 billion. Saying that there were more than enough dollars, that it was easy to lower inflation and delaying capital market reform by 18 months were all tremendous errors. 

 

How much of that US$20 billion accumulating between 2015 and 2019 will fall due in the next few months? 

Around US$3.3 billion in the next six months.

 

About 15 percent in the next six months. Is that superior to the usual average for debt deadlines? 

It’s not abnormal. What’s happening is that we are in a difficult cycle, not that we are asking complex things of businesses. To name a public-sector company, YPF restructured, as did Aeropuertos Argentina 2000, Celulosa and Telecom.

 

How will a company obtain dollars if its creditors do not wish to restructure? 

The companies have to help us to make this effort. We’ve told them to present a proposal. I think they will understand the problem and that it is better to restructure externally than to continue taking on debt in pesos locally. Nor do they have the surplus to pay that debt. 

 

But if that were so, they wouldn’t have any other alternative but to restructure. 

They have no other option but to roll over. We’re asking them not to roll over on local markets but on external ones. 

 

Assuming that the state will not be able to access voluntary credit markets for a while, the government explained that renegotiating the public debt instead of default was aimed at enabling companies to continue assuming debt but at lower interest rates thanks to a descending country risk. Hasn’t that increased with the latest measures? Isn’t there a contradiction? 

We don’t think so. We did not propose extreme restructuring or anything of the kind. We need to resolve a cyclical problem.

 

A cyclical problem until the next harvest?

And the debt payments which will be falling due in the next six months.

 

Until the next season for dollar entry?

Exactly.

 

Talking of savings, tourism is another source of dollar demand. Before the  pandemic there was a deficit between incoming and outgoing tourism. You mentioned that the pandemic had deprived the bureaux de change in Argentina of foreign tourist dollars but if there were no pandemic, the pressure on exchange markets overall would be worse.

We’re talking about the issue of the parallel exchange rate, which we call illegal. That has fallen below the so-called ‘Dollar País’ or the dollar for private savers. Brazilians in Buenos Aires, Chileans in Mendoza, Paraguayans and Brazilians in Misiones – if we open the frontiers with the current exchange rate, we’d be invaded, no doubt about it.

 

Invaded by tourists? 

No doubt about it.

 

To what exchange rate are you referring? 

Our Latin American neighbours know us and our exchange markets. Furthermore, Chinese and European tourists were arriving. I’ve been president of the Tierra del Fuego provincial bank and I’ve seen the number of cruisers sailing to the Antarctic and to the Chilean fjords, something which was growing exponentially every year. Our exchange rate is good for tourism and even more so the exorbitant exchange rate imposed by the speculators. 

 

If a vaccine were to appear and be massively applied, enabling you to recover international tourism in both directions in the second half of next year, would the tourist balance of payments be positive, unlike in recent years? 

Argentines have a unique and extraordinary vocation for travelling abroad. We’ve had months of having to pay up to US$1.7 billion for trips abroad. I wish foreigners had that vocation to visit Argentina.

 

How would the Central Bank comment on the forecasts for inflation, the dollar, imports and exports in the 2021 Budget? 

We’ve come from two years of very high inflation of around 50 percent, which has been moderated this year. The expectations for the levels of this year’s inflation have proved erroneous. We’ve been successful in slowing down inflation and we would have been even more successful without the problem of the pandemic, both in terms of growth and inflation. The forecast is that inflation will continue slowing down next year. That’s not extremely optimistic, projecting perfectly feasible levels of recovery after a very difficult year like this. 

 

Everything you’ve said up to here sounds very different from what the newspapers are saying. If someone were to read them from abroad, they might imagine the country on the brink of absolute catastrophe. To what do you attribute this dissonance between your own perception and what many people, including numerous businessmen, are seeing?

It’s a tough cycle with difficulties which we must resolve – high inflation and balance of payment problems. A lot of work and effort is required from both the state and companies. We have speculative components in our economy ready to pay an irrational and exorbitant 130 pesos for a dollar. Those overseas funds ready to pay that sum to exit their peso assets are not looking at growth. They couldn’t care less about development. Anybody ready to pay 130 per dollar on an illegal exchange market has what I would call a speculative attitude. That puts us in a hard place which we are trying to control. 

 

Is a dollar at 130 pesos like the four pesos of 2002? 

It’s a dollar which would inflict uncommon and unbearable levels of poverty on our country. I don’t want to imagine what could happen. If we isolate that speculative behaviour, the  referential exchange rates would have to lower their price. It would be a very important step to prevent overseas funds from exchanging bonds for dollars within the contado con liquidación scheme. They were taking out US$450 million a month. Anybody ready to pay that price for a dollar makes an extraordinary noise in our economy. 

 

I’m not going to interview you again until next year. What final message would you like to leave us as to the perspectives for 2021?

Argentina has good conditions for growth. We are in a cycle aggravated by speculative issues. We are hoping that we can isolate those conducts and return to growth, increasing our exports, developing our capital markets and turning our domestic savings into growth and production. Those are the structural changes to which the state, the political sectors, businessmen and trade unions must all be committed.

 

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Jorge Fontevecchia

Jorge Fontevecchia

Cofundador de Editorial Perfil - CEO de Perfil Network.

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