A devaluation by any other name would smell as… sweet?

Earlier this week, the Argentine Central Bank (BCRA) unexpectedly allowed the official dollar exchange rate of the peso to depreciate dramatically. On Tuesday, the peso depreciated by 3.4 percent and on Wednesday it fell by a further 12 percent, closing the day at 8 pesos/dollar compared to 6.84 on Monday, a 16.96 percent fall in just two days. Yesterday the peso fell to as low as 8.5 pesos/dollar before the BCRA intervened and brought its value back up to 8.2 pesos/dollar. This morning, Cabinet Chief Jorge Capitanich and Minister of the Economy Axel Kicillof announced that the government would lower the tax for obtaining dollars from 35 percent to 20 percent beginning Monday, a significant loosening of the capital controls that have choked off legal access to dollars to many Argentines and fueled a black market whose exchange rate is nearly 60 percent higher than the official rate.

There are a number of reasons why this happened when it did, but it essentially boils down to the fact that the government could no longer afford to maintain its previous policies. Specifically, Argentina’s currency reserves dropped below $30 billion this month for the first time since 2006 while a $15 billion debt payment looms and, because of a convoluted web of subsidies and frozen prices in the energy sector, the energy deficit could be around $10 billion this year. There is little expectation that there will be any influx of new reserves this year, leaving the Central Bank unable to continue depleting the reserves in an attempt to engineer a series of microdevaluations until the gap between the official dollar and the “blue” dollar was closed, or at least tolerably narrow.

The problem for Argentina is that, while a devaluation was necessary and unavoidable, without accompanying measures to address the forces weakening the peso, it will just be the first of many. The fundamental problem is that the Argentine government is monetizing its fiscal deficit, injecting billions of pesos into the economy when there is no demand for them since the government can’t borrow to cover its deficit. This creates enormous downward pressure on the value of the peso which the government has combatted through a combination of capital controls—limiting access to dollars—and aggressive interventions in foreign exchange markets to prop up the value of the peso by selling its international reserves. It is also highly inflationary, which puts further pressure on the peso as Argentines try to protect the value of their money by converting their pesos to dollars as quickly as possible.  Since the currency controls limit the legal options for Argentines to obtain dollars, the blue, or black market, dollar emerged and, in recent months, has been trading at a value between 50 and 75 percent above the official dollar.

Argentine officials are likely hoping that this week’s devaluation and the loosening of the currency controls next week will bring the official dollar more in line with the blue dollar. Moreover, they also are hoping that a series of price control agreements with the major supermarket chains and the early and quick negotiations over salary increases for the major unions will act as a brake on inflation for the rest of the year. However, as Lucas Llach points out, this is very unlikely as the salary negotiations will likely be in the range of 30 percent—exacerbating a wage/price spiral already in effect—and become the monetary emission shows no sign of slowing. So long as monetary policy remains so expansionary the inflation pressures will remain and the pressure on the peso will remain. This is why, despite the devaluation, the gap between the official and blue dollar remains in the same range it has for the last several months; no one sees this as addressing the root problems and therefore expect further devaluations.

What happens going forward is highly speculative. Some of this speculation is that the suddenness of the measures and the dearth of explanation by the government indicates that the government is planning major changes. This is certainly possible, though what those changes would be is difficult to guess as Kicillof and other prominent policy makers continue to essentially deny the facts on the ground in their public statements, meaning any serious changes would be a major about-face. In the more likely event that these were measures taken in desperation and not as part of a broader economic strategy, things look fairly bleak. The inflationary spiral will continue unabated with the ever-lurking possibility that it will spiral completely out of control as further ad hoc heterodox measures to contain it fail.

At the end of November, I was able to attend at the Inter-American Dialogue a meeting of the Latin America Economies Roundtable (LAER). The general consensus at the meeting, by a number of very intelligent and well-informed people was that Cristina Kirchner’s government could probably muddle through the last two years of her term without a crisis so long as inflation stayed below 25 percent, the deficit didn’t exceed 3 percent of GDP and commodity prices didn’t fall dramatically. According to the Billion Prices Project, year-on-year inflation is above 24 percent so far this year and the budget deficit last year was right at 3 percent. Commodity prices—particularly soy—appear unlikely to fall in the coming year, but the potential for further devaluations could encourage farmers to delay selling their product, putting a severe strain on government revenues, widening the fiscal deficit and feeding into the inflationary loop. In other words, while these are relatively arbitrary conditions, they are useful as rough benchmarks for the stability of the Argentine economy and Argentina is already pushing the upper bounds on them with plenty of factors there to push the country well beyond them.

Argentina may not be on the verge of a crisis yet, but low growth and high inflation seems like a relatively optimistic scenario for the rest of the Kirchner presidency.


When one person dies, it’s a tragedy

Former Miss Venezuela and telenovela actress Mónica Spear and her husband were murdered along a highway between Puerto Cabello and Valencia Monday night in an apparent robbery attempt after their car had broken down. Their five year old daughter survived the attack, but was shot in the leg. Spear’s murder is certainly the most high-profile in the country in several years, but only because she was famous in her own right, not because the incident itself was particularly out of the ordinary. In fact, Spear’s murder is particularly upsetting because events like that have become so commonplace in Venezuela in the past decade.

For some context, the murder rate in Venezuela in 2013 is estimated to be as high as 79 per 100,000 people, although there are no official statistics released anymore. That is nearly four times the murder rate (22 per 100,000) in Mexico in 2012, even as Mexico remains embroiled in violence as a result of its role in the Drug War. Similarly, Colombia, which is famous for its violent drug cartels and paramilitaries and where the FARC and ELN remain active, the murder rate was only 33 per 100,000 in 2011 according to the UNODC. Even during its most violent periods in the early 1990s and again in the early 2000s, the murder rate never surpassed 71.8 per 100,000. The only country in the world in 2011 which had a higher murder rate than the estimated one in Venezuela is Honduras, at 91.6 per 100,000. Honduras, however, is an extremely poor country that, since the coup in 2009, has had a barely functioning government and sits in the middle of prime drug trafficking lanes. Compare it to Venezuela, which has traditionally been able to avoid the ravages of the drug trade and is a wealthy petrostate. Even if you accept the government’s dubious claims that homicides have fallen dramatically since Nicolás Maduro took power, the rate of 39 per 100,000 would still rank among the very highest in the world.

The issue is not just murders, either. Kidnappings have become extremely common in Venezuela, including high profile kidnappings such as Washington Nationals catcher Wilson Ramos in 2011 or the Mexican ambassador in 2012.

The government has implemented a myriad of anti-violence plans in the past few years, including mobilizing the military to act as a security force. None has been successful, however, and many gang leaders are reputed to have ties to the government. Surely, a high profile case like this one will spur the government into some sort of action, though likely one as equally ineffective as its predecessors. Meanwhile, extreme violence–and the lasting effects that has on a society–will continue to be the norm in Venezuela.

Mexico: Always a bridesmaid…

The World Cup in Brazil is now barely six months (!) away and like many around the world I am eagerly considering my Yank’s chances to win—not as unlikely as some might imagine—and, more realistically, the chances my second team, Argentina, has to finally catapult Lionel Messi unquestionably into the stratosphere of the all-time greats1 with a third—and hopefully completely controversy free2—victory. Beyond that, I like to consider which Latin American powers are the most impressive in their World Cup performances, and which ones are most disappointing. On the surface, this seems obvious: clearly Brazil, with its five World Cup titles is the most impressive and perhaps Peru or Mexico is the most disappointing. As far as the former goes, I don’t know if I agree and would argue that Mexico is definitely the most disappointing, once you consider population, passion for the sport and economic development.

Perhaps labelling Mexico is the most disappointing country among the Latin American powers—which I’ll somewhat arbitrarily define as the large, non-baseball-loving countries in the region—smacks a little of bias, since I am an American and they are our biggest rival. But consider this: Mexico is the second largest country in the region, the fourth richest (in per capital GDP at purchasing power parity, according to the World Bank) and was either the richest or second-richest country in the region in 1980, 1990 and 2000. One can assume that elite athletic ability is distributed roughly evenly across populations (i.e. if one person in a million, on average, could be a world class player, then a country with 1 million people would have ~1 of those people and one with 100 million would have ~100) then a country’s success in a given sport is essentially a function of its population, the propensity of an athletic person to play a given sport and its ability develop those athletes as a result of affluence and competence (in their analysis in Soccernomics, Simon Kuper and  Stefan Syzmanski include several other variables, but in the case of Latin America, they largely cancel each other out so I won’t use them). Apart from Venezuela (where baseball reigns supreme), all of the large Latin America countries are roughly equally soccer-mad so top athletes probably all play soccer at roughly the same rate as well, simplifying things to a function of population, affluence and ability to develop players.

When you look at Mexico’s historical performances through this lens, it really looks unimpressive compared to Brazil and Argentina—who have are considered superpowers and have won seven World Cups—but also to lesser powers like Chile, Colombia or Ecuador, and especially compared to tiny Uruguay. Among these countries, only Brazil is more populous (currently about 195 million compared to 118 million), but its GDP per capita has consistently been less than 80 percent of Mexico’s. Yet Mexico has never made the semifinals at a World Cup while Brazil has won five times. Argentina, while slightly richer, has a much smaller population, yet has produced two of the greatest players of all time and won two World Cups.  Most embarrassingly for Mexico, Uruguay, which has a population of just under 3.4 million people—which would make it the 4th largest metropolis in Mexico and is just 17 percent the population of greater Mexico City—has won two3 World Cups and the Copa America four times. Even Chile, which has not be traditionally considered a power, has less than a fifth Mexico’s population and only became more affluent than Mexico in the past decade has achieved similar World Cup results, despite having fewer opportunities thanks to its much more confederation. Mexico should be a major power, considering its size, relative affluence and its love of the game, yet smaller, poor countries have consistently outperformed it historically, and the United States, where soccer is, at best, the fifth most popular sport, has arguable surpassed it.

Many of the same things that make Mexico so disappointing, make Brazil less impressive than might appear at first blush. For instance, while Argentina has consistently been about 30 percent richer on a per capita basis than Brazil, it has, since 1970, never had a population that was even 25 percent that of Brazil’s, yet in that same period, Brazil has won three World Cups and Argentina has won two. Obviously, three World Cups is amazingly impressive, but it also speaks to both the relative inability of Brazil to develop its vast reserves of talent compared to smaller but richer countries as well as the vagaries of single elimination tournaments. That Brazil won the Copa America five times since 1983 and finished second three other times mitigates this to a large degree, but in that same period, tiny Uruguay has won four times and finished second twice. The point is not that Brazil isn’t fantastic—obviously it is—but that it really could be much more dominant than it has been.

In the end, as much as I would love to call Argentina the most impressive Latin American soccer power, it’s difficult to ignore the incredible achievements of the Uruguayans. Despite being far and away the smallest country in South America, it has remained consistently competitive in a region considered only slightly less deep than Europe and has had tangible success in the World Cup, including a fourth place finish in the 2010 World Cup in South Africa. Moreover its success casts into stark relief Mexico’s really disappointing results, which despite its giant population and significant resources relative to other countries in the region, has failed to ever even sniff the type of success Uruguay has achieved.

1 That said, the argument that Messi’s legacy would somehow be tainted if he never wins a World Cup is ludicrous. When Pele and Maradona were winning their World Cup’s the level of competition was vastly inferior to what it is today. The very best teams were dramatically better than the next tier of teams and, outside of a handful of powers, just weren’t that good compared to even middling sides today. That’s not to detract from their greatness in the least. But it is unfair to Messi to say he must win a World Cup to be considered their equal when it is, objectively, much more difficult to win the World Cup now, even with the world’s best player, than it was even 20 years ago.

2 That Argentina won in part due to Maradona’s “Hand of God” goal against England still only makes it Argentina’s second most questionable World Cup victory. That’s even though that goal should not have counted and he should have been red carded. That is because the Argentine junta in power in 1978 is rumored to have employed all manner of shady tactics to help ensure a popularity-boosting victory in the home World Cup, including possibly bribing the Peruvian side to intentionally lose the final group match 6-0—the margin of victory Argentina needed to advance—and employing intimidation tactics against the refs and Dutch players in the lead up to the final.

3 I don’t really like to count World Cups played before 1950 as being equivalent to those played since because of stories like this.