What's Next With The Peso Devaluation?

[John.St]

... They then find themselves 2 years later with no energy infrastructure, no means to develop it domestically, no dollars to hire an external firm to do it, and no investors willing to take the risk of developing the infrastructure because it's a nation that has a habit of stealing all people's investments out of "national interest".

As in: 'Argentina, living on other people's money'? B)

 

[CarryOn]

Energy based nations that have smart economic policy, like Saudi Arabia or Norway, preserve huge amounts of the profits from their oil industry and invest it in massive globally diversified investment funds (referred to as sovereign wealth funds) in order to leave a legacy for future generations when the oil runs out, and to protect their economies from recessions caused by falling oil prices. Basically they have loads of money to spend when the economy looks bleak. Energy based economies that are poorly managed, ie Venezuela, squander all that income building a "socialist paradise" and then when the price of oil drops, fall into major crises.

Other poorly managed energy based economies (or would-be energy based economies), woo investors (ie Repsol in Spain buying YPF) to develop their oil fields, only to expropriate (or nationalise) Repsol's assets arguing that they underinvested in infrastructure. They then find themselves 2 years later with no energy infrastructure, no means to develop it domestically, no dollars to hire an external firm to do it, and no investors willing to take the risk of developing the infrastructure because it's a nation that has a habit of stealing all people's investments out of "national interest".

Just a comment on the Norwegians, their sovereign wealth fund is the single largest investment fund in the world. It's called Norgesbank. It's so big that they currently own approximately 2% of every company listed on European stock exchanges. The goal of the fund is to be able to reproduce the income stream of their oil resources forever once their oils runs dry, and to do so solely from the interest and dividends on their investments. All I can say is WOW! A Norwegian passport is worth it's weight in gold a thousand times over. I wish Canada had that policy...

Just another economic rant ;-P

Reneige

Got to agree with you there about Canada - if only we'd emulated Norway. The smartest thing the next President of Argentina could do would to set up a similar sovereign wealth fund for the government reap on Vaca Muerte. History's odds say they won't, but if they did and kept it whole, it could do a lot of good for a long time.

I will slightly disagree about foreign investment as it pertains to Vaca Muerte - we have seen both Chevron and CONOC invest recently in initial exploitation, and if the Repsol settlement is finalized, this may expand further. But your point is still a good one - the YPF nationalization chilled investment and has delayed the entire project by at least half a decade.

 

[Page8383]

Precisely that. The "price" of a dollar is what people are willing to buy it for. The "value" of a dollar is based on the extent to with people with a foreign currency are willing to purchase the goods/services produced by the nation issuing dollars, or invest in that nations assets. That's why when people tell me that the dollar is worthless because it's not backed by anything (usually uninformed people who think currencies should return to the gold standard), I retort that the dollar is backed by all the goods and services produced in the US. Basically as long as people are buying iPads, using windows computers, or advertising on Google, the dollar has a lot of value.

This is also why when the price of oil falls, generally nations whose expors are largely energy based fall as well. As in the case of Venezuela now, although they are trying to sustain an artificial dollar link. The "blue dollar" in Venezuela trades at 10x the official rate, way beyond what we see in Argentina (2x). It's also is a criminal offense to engage in the market so don't attempt to if for whatever reason you end up there.

Energy based nations that have smart economic policy, like Saudi Arabia or Norway, preserve huge amounts of the profits from their oil industry and invest it in massive globally diversified investment funds (referred to as sovereign wealth funds) in order to leave a legacy for future generations when the oil runs out, and to protect their economies from recessions caused by falling oil prices. Basically they have loads of money to spend when the economy looks bleak. Energy based economies that are poorly managed, ie Venezuela, squander all that income building a "socialist paradise" and then when the price of oil drops, fall into major crises.

Other poorly managed energy based economies (or would-be energy based economies), woo investors (ie Repsol in Spain buying YPF) to develop their oil fields, only to expropriate (or nationalise) Repsol's assets arguing that they underinvested in infrastructure. They then find themselves 2 years later with no energy infrastructure, no means to develop it domestically, no dollars to hire an external firm to do it, and no investors willing to take the risk of developing the infrastructure because it's a nation that has a habit of stealing all people's investments out of "national interest".

Just a comment on the Norwegians, their sovereign wealth fund is the single largest investment fund in the world. It's called Norgesbank. It's so big that they currently own approximately 2% of every company listed on European stock exchanges. The goal of the fund is to be able to reproduce the income stream of their oil resources forever once their oils runs dry, and to do so solely from the interest and dividends on their investments. All I can say is WOW! A Norwegian passport is worth it's weight in gold a thousand times over. I wish Canada had that policy...

Just another economic rant ;-P

Reneige

It's an interesting case study the, Norwegian one. Australia has a similar fund that is aimed at paying all of the public servant's pensions via its dividends by 2020, when the funds size should be $140 billion. Norway's should be $1 trillion by this time I just read.

But there is the other side of the coin. I remember seeing a documentary on Nauru and their Phosphate Royalties Trust Fund. This tiny Pacific nation had stacks of phosphate that literally could have made every citizen on the island nation a millionaire. It went well for a while. But they blew it through a series of bad investments and an inability to pay their debts. Foreign creditors then seized their (i.e. the Fund's) assets and the phosphate ran out. The country went broke and still is to a large extent. A real shame.

Sovereign wealth funds are a great idea for resource / budget surpluses, but they do need to be managed properly and probably with a high level of transparency (Australia's and Norway's are both independantly managed). Because I can see certain types of people seeing it as an Aladdin's Cave to be raided (not mentioning any names) or a slush fund for 'investing' into a brother-in-law's fledgling construction firm - and other amateur hour antics.

 

[Joe]

Got to agree with you there about Canada - if only we'd emulated Norway. The smartest thing the next President of Argentina could do would to set up a similar sovereign wealth fund for the government reap on Vaca Muerte. History's odds say they won't, but if they did and kept it whole, it could do a lot of good for a long time.

I will slightly disagree about foreign investment as it pertains to Vaca Muerte - we have seen both Chevron and CONOC invest recently in initial exploitation, and if the Repsol settlement is finalized, this may expand further. But your point is still a good one - the YPF nationalization chilled investment and has delayed the entire project by at least half a decade.

No politician in his right mind would start a sovereign wealth fund in Argentina because he would know the next party in power would loot it for personal gain or buying votes.

 

[Rich One]

Market Expectations are for an Official dollar of $10 pesos by mid year , assume a 50 % spread for the Blue?

http://www.infobae.c...ar-10-mitad-ano

El Banco Central no logra enfriar las expectativas: hay apuestas por un dólar a $10 para mitad de año


While the Government reiterates that the dollar reached a level of convergence around $ 8 as now, the bets taken in the financial market show otherwise. In future dollar operations, which are conducted in the OTC market (MAE) and the Rofex arises that a further devaluation expectations are latent: the official dollar contracts for half of this year are around 10 pesos . This would make a devaluation rate of 45% annually.

 

[Reneige]

Reviving this old topic with an article I found very interesting : http://www.reuters.com/article/2014/02/06/argentina-peso-idUSL2N0LB1WD20140206

Essentially the current strength of the peso is due to a recent government policy forcing banks to sell of their dollar holdings. It's assumed that the central bank will purchase them at a favourable rate in order to improve their reserves. This will have very limited impact on their reserves figure since most of the commercial banks keep their dollar deposits at the central bank anyway.

It does make we question what the end plans is however. The government creates a policy allowing people to purchase dollars in limited quantities and charges a harsh tax unless they deposit that money in their banks. Then they force the banks to sell their dollar holdings, or keep them deposited at the central bank. These reserves are then used to finance energy subsidies and external debt and are bleeding quickly. What will happen to people's deposits if those reserves reach a critical level?

Scary prospect. I question whether people will every receive the dollars they purchased under the governments new policy...