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AQ Feature

Currency: Argentina's Devaluation

When Argentina devalued its peso by 19 percent against the U.S. dollar in January, Brazilian President Dilma Rousseff reaffirmed her country’s independence from the volatile currency of its southern neighbor. “It will not have significant consequences,” Folha de São Paulo reported her saying. Indeed, Brazil has large international reserves, a balanced budget and consistent growth due to large domestic demand. But while the so-called “tango effect” of the devaluation has been negligible, Argentine protectionism is still a challenge to Brazil’s economy.

Before the devaluation, Argentina’s foreign reserves had reached record lows as the administration of President Cristina Fernández de Kirchner attempted to sustain the overvalued peso. The government’s decision to let the peso slide toward its truer value helped stabilize foreign reserves, which the country has relied on since being locked out of international credit markets in 2002.

To prevent the further depletion of the money supply, however, Argentina has continued to enforce harsh restrictions on imports.

This has been implemented through declaraciones juradas anticipadas de importación (sworn affidavits of intent to import—DJAI), which function as import permission slips. DJAIs monitor imports to protect Argentine international reserves. But these new bureaucratic regulations, further complicated by a lack of alternative financing options for Argentine buyers, have stalled trade. According to the Cámara de Importadores de la República Argentina (Chamber of Importers—CIRA), companies are making multiple declarations on the same products to improve their chances of importing goods, and the Central Bank is adding to the problem by unofficially delaying or denying requests for dollars above the amount of $300,000. Even with the easing of restrictions, Argentines must still have approval to purchase foreign currency.

The red tape has intensified fears in Brazil that exports to its third largest trading partner will fall precipitously, causing a trade deficit by the end of the year. Consumer behavior is also a factor in the import slowdown: Argentines are buying fewer products as a defensive move against rising inflation. Such factors have driven import figures early this year to the lowest they have been since January 2010. For example, Brazilian exports of diesel-powered cars to Argentina declined by roughly 6 percent in comparison to last year. Overall, trade between Argentina and Brazil fell 16.9 percent in January and February. Bilateral exports declined by 23.3 percent and imports by 11.8 percent.

But even prior to the latest Argentine currency adjustment, divergent economic interests among Argentina and other countries in the Mercado Común del Sur (Southern Common Market—Mercosur) have been increasingly apparent—triggering familiar charges by economists that the trade bloc itself is having a crisis. While the charges may be overstating the case, the difficulties Mercosur countries have experienced in accessing Argentina’s market have prevented further progress in improving the trade zone, and caused other countries to fortify themselves against the instability of Argentina’s exchange rate.

Apart from the fact that Argentina’s devaluation narrowly increased the competitiveness of its exports—soaring inflation quickly took away any edge—closing the gap between the official and black market exchange rates has had only small consequences on the varied agendas of Mercosur countries. These days, trade barriers and the prices of commodities traded among the bloc—such as soybeans and wheat—are of larger concern to Argentina’s neighbors.

The lack of strong regional integration has also spurred an energetic push toward finding more open markets. Brazil, Uruguay and Paraguay are once again actively trying to revive a free trade deal with the European Union (EU). The decade-long discussion took on greater urgency due to the prospect of additional currency devaluations in Argentina. Notably, Venezuela, which joined the trade bloc in 2012, is also not part of the negotiations.

As it continues trying to boost production at home, Argentina has shown a steady lack of enthusiasm for any trade deal with Europe. Among other initiatives, the country’s state-owned oil company, YPF, has rushed to increase gas and oil production, and a recently passed law would encourage the development of an auto parts industry.

A potential EU–Mercosur agreement, which would include easing tariffs on 90 percent of goods, has had Argentina insisting on redefining the terms. Since all five Mercosur countries will have to be in agreement before they can put anything in ink, a final EU deal has stayed frustratingly out of reach, although Brazil could sign a deal alone.

For now, a few ideas for improving trade ties within the bloc have been suggested. One would be to use local currencies for imports and exports to reduce Argentina’s demand for dollars. Although even under this plan, Argentina’s highly unpredictable currencies could still remain a problem.

The second proposal, which appears to be on its way to implementation, involves opening a private line of credit between Brazil and Argentina so that buyers are not forced to turn to the Central Bank. The operations would be limited to 15 or 20 percent of bilateral trade between both countries, and the Central Bank would not be able to block payments to Brazilian exporters.

CIRA spokesman Miguel Ponce, however, maintains that the best-case scenario would be if Argentina comes to an agreement with Mercosur on a free trade deal with the EU. “Better integration with the world would improve the way Argentina conducts trade with foreign countries in the region,” he said.

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Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Argentine economy, currency devaluation