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Tango Nuevo
Argentina’s New President Begins Reforms

Argentina’s new President, Mauricio Macri, lifted some currency controls and eliminated export duties yesterday in a move he argues will provide a much-needed shot in the arm to the country’s moribund economy. The Buenos Aires Herald:

Most of the restrictions on the dollar trade no longer exist, and the peso is likely to lose at least 40 percent of its official value as a result.

Starting today, companies and individuals will be able to buy foreign currency for up to two million dollars per month each and there will be no limits for importers. But the Central Bank will only sell them dollar reserves at a much higher price than it currently does, resulting in a devaluation.

Finance Minister Alfonso Prat-Gay refused to say yesterday at which “magic number” he expected the dollar to be traded today, but hinted that the equilibrium rate he foresaw was similar to the blue-chip-swap rate, where dollars are currently sold for 14.26 pesos each.

The early days of reforms are likely to be tough. The artificially overvalued peso and a mare’s nest of controls created distortions. As the restrictions are lifted, the peso (as the piece notes) will likely fall dramatically, raising the price of imported goods and increasing an already high inflation rate. Reform during this time won’t be popular, but it needs to be done. Argentina’s Leftist government left the economy in deep trouble, just as happened in Brazil and Venezuela as well, and painful changes are needed to rescue its economy.

It’s a good sign that Macri isn’t shying away from tough reforms. But winning the election was only stage one for him, and his tenure isn’t going to be easy. From the powerful labor unions to the bureaucrats and judges appointed by the old government, Argentina is full of powerful forces that will seek to undermine the new President wherever possible and blame him for any trouble. When you factor in the shaky fundamentals of the world economy, it’s clear that Argentina has a tough road ahead.

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