Economy Minister Hernán Lorenzino delivered the 2013 budget proposal to Congress today, giving the nation a peek into the executive branch’s vision for the coming year.

The proposal predicts an exchange rate of $5.10 to the dollar, growth at 3.4%, and growth in investment at 7.4%. The official inflation rate is estimated to hit 10.7% by the end of 2012 and 10.8% in 2013. Tax revenue is expected to total over $822bn, a 22.7% increase from 2012, reflecting at least in part, a rise in inflation. The trade surplus, according to official estimates, will be more than US$13bn.

The current policy of paying off foreign debt with reserves will be continued up until US$7.8bn. This cap exceeds the US$5.7bn paid in 2012 by 40% and 2011’s US$7.5bn by 5%.

Agustín Rossi, Congressional Head of the Frente para la Victoria (FPV), the same party to which President Cristina Fernández de Kircher belongs, was optimistic about the proposal. He applauded the continuation of “social investment” and debt reduction, and commented that the proposal used a “level of reasonable expectations” for growth. He predicted the Budget and Treasury Commission would begin to consider the proposal next Wednesday and that by late October, the congressional Lower House would have approved it and passed it to the Senate.

In an interview with Ámbito Financiario, Minister of the Economy Hernán Lorenzino defended official exchange policies and remarked that the so-called ‘blue dollar’ is illegal.

After weeks of outcry about new restrictions on currency exchange, Lorenzino defended the government policies, stating, “Today, the policy of accumulation of reserves is one of the pillars of the [economic] model. The exchange policy is part of this strategy. The objective is to preserve the reserves for the goals of the general political economy.”

He remarked that these reserves “have always been a part of the policy of debt reduction for this government. Not only as an assurance against the crisis, but also as a source of financing for the government towards the private sector.

Lorenzino further stated that the underground exchange market is “illegal, in addition to being marginal.” This statement to Ámbito Financiario marks the first time the minister has spoken so openly about the informal exchange.”

On the official market, the US$1 can be traded for AR$4.56. The same dollar is worth an estimated AR$6.27 in the informal market.

The minister insisted that the government’s exchange policy is part of a greater economic policy that aims to “confront a global economic crisis in a country that will grow this year in a world in recession.”

Amidst claims from former officials that inflation is rising and the country could be entering a recession, Lorenzino insisted there is “not a single piece of evidence” that would suggest the country is headed for a recession. When asked about inflation, he responded, “Our concern is maintaining growth and sources of work. All active policies and their consequences are aimed at that.”

With regards to recent critiques from former ministers, including former Minister of the Economy Roberto Lavagna, Lorenzino critiqued, “no analysis is innocent.”

The economic minister’s remarks followed the announcement by President Cristina Fernández de Kirchner of the final payments of Boden 2012.

The Boden 2012 were bonds issued by the Duhalde government in 2002 as a way to repay the people who had been affected by the ‘Corralito’ policy. Then, holders of fixed-term deposits and accounts denominated in US dollars had the option of converting their savings to pesos at a lower exchange rate or accepting dollar-denominated government bonds.

Over the ten years since the bonds were issued, payments have cost the government around US$19.6 bn. The final instalment –scheduled for tomorrow, 3rd August – will cost the state an additional US$2.2bn.

Lorenzino stated that this payment indicates that, “the policies begun by Néstor Kirchner and continued and expanded by Cristina de Kirchner were appropriate and should be further expanded.”

Buying US dollars from illegal street traders now costs 35% percent more than the official conversion rate. Tourists and locals seeking out the US currency under the table face paying up to $6,05 for each dollar instead of the official $4,48.

According to Clarin’s supplement iEco, many account holders are taking advantage of the situation by withdrawing dollars from banks to eventually sell them on the black market, thus resulting in a general increase in the availability of so-called “blue” US dollars.

Buyers, however, are waiting for the unofficial exchange rate to plummet, procrastinating their decision to buy the currency.

Undercover police agents also shut down two currency-trading shops in Palermo this morning that were operating without the licence granted by the Central Bank (BCRA). The window of the first shop, located in Federico Lacroze Avenue 2300, said “send money abroad fast and safe”

After the recent governmental crackdown on operations made in the US currency, it’s becoming increasingly hard to score dollars within the official circuits. The Federal Administration of Public Incomes (AFIP) has decided to restrict the selling of US dollars almost totally. Before, the US dollar was sold at $5,07 on the black market, 19% more than the official exchange rate.

Government sources close to the financial newspaper Ambito Financiero revealed that buying US dollars would be virtually impossible until next August.

According to the Wall Street Journal, almost US$3bn “have left the banking system since President Cristina Kirchner implemented foreign-exchange controls in late October, aimed at protecting the country’s international reserves from capital flight.”

The government is trying to save dollars as financial uncertainties still loom over the country and the global economic climate outlook is still bleak. It is planning to use $5,67 billion of reserves to pay creditors this year.

It is also not yet clear how many dollars will be required for energy subsidies and pending payments to gas companies as the cold winter approaches.

The price of buying dollars soared yesterday as the result of new AFIP restrictions on money exchange policies that went into effect Monday.

The black market price of a dollar climbed 20 Argentine centavos to $4.90 in the city of Buenos Aires. In other areas of Argentina, the dollar sold for as much as $5.

Many people, who are finding it difficult to buy foreign currency through legal means, have withdrawn their savings from banks and turned to black markets to exchange their pesos into dollars.

The supply of Central Bank reserves lost $150 million dollars yesterday despite not putting dollars out for sale themselves. The depletion is due, instead, to private account holders withdrawing their deposits in dollars.

Ninety-four percent of these deposits are made by people who had bought dollars and put them in a savings account instead of putting them in a safety deposit box or hiding them in their homes. Now, these same people are worried their dollars will be confiscated, so they are withdrawing them and making other arrangements for their safekeeping.

Former cabinet head Alberto Fernández says that the government’s restrictions on exchanging money are only scaring people into doing just that. “It is a measure that was taken to prevent dollars from exiting, but the dollars are continuing to leave,” he said.

Yesterday the dollar closed at $4.28 on the official market.

After settling down after the debt default in 2001/2, the value of the peso has been gradually dropping over the past few years. This has accelerated in the past couple of months in the run up to presidential elections on 23rd October – mostly caused by Argentine business and individuals converting their money from pesos into dollars.

The Argentina Independent talked to people in Plaza San Martín to ask their views on the current exchange rate and what they think is going to happen next.

Katherine, 23, psychology student, Colombia

Well, I am not from Argentina, I am from Colombia! So the exchange rate from the dollar to the Colombian peso is more important to me. But for Argentines, it’s a question of whether the dollar is changing value against other currencies, because there are some troubles in the US at the moment. 5,000 Colombian pesos is equivalent to around 15 Argentine pesos, which for me is expensive. I think that the dollar is seen here as a safe haven. But I am only here for one year so any change in the exchange rate shouldn’t really affect me.

Raul, 66, sales / commerciante, Caballito

The dollar? It is not as cheap as it used to be, and I think a dollar will soon cost five pesos. It is not something I know a lot about, but from listening to people and from commentary on the television it seems it is like this. I think more important to my business is inflation because it is hard to know what prices should be from one day to the next, and inflation is more than the government says. But then surely a cheaper peso means cheaper Argentine wine for foreigners!

Paulo, student, 19, Caballito

I understand that before the exchange rate was fixed and that is how it caused a lot of problems at the start of the last decade. So I think a flexible currency is good, and the current level is sensible. I think that to maintain the economy the peso has to be weak because we rely on exporting a lot of products to other countries. At the same time there is quite a lot of speculation about inflation, and I think the government will do something about this after the election.

Milaperos, 82, retired, Barrio Norte

Oh it doesn’t really matter to me as I don’t work anymore and I don’t travel overseas.
But in this country I remember the cost of dollars has always been changing one way or another and there hasn’t been much the people can do about it. I think the government intervenes a lot.

Raul, tourism, 50, San Isidro

I remember it was 3.50 pesos to the dollar not too long ago and it has changed a lot since then. It is not as strong now and I think inflation has a lot to do with it. But a cheaper peso does increase visitors to Buenos Aires and to Argentina.

A lot of people are transferring their money from pesos into dollars, but I think that with inflation being so high, when they transfer it back to pesos to spend it, it will actually be worth less. And so whatever we do we end up paying more.

On Sunday 10th January President of Venezuela Hugo Chavez announced that prices will not rise following the devaluation of the bolivar on Friday. He condemned the “games of the speculating bourgeoisie” and insisted that National Guard would intervene if any business chose to increase prices in response to the recent devaluation. The President has asked ministers to present a price control operation on Monday.

Chavez has ordered that all businesses which make profits from speculative actions will be expropriated and “then we will give them back to the workers, the people”. He has called for the private and public sectors to work together and not to take advantage of government announcements to “destabilise the country and provoke terror in people”.

The new monetary system includes a two-tiered exchange rate in order to lessen the impact on prices for priority imports. One is at 2.6 bolivares per dollar for imports such as food, medical products and machinery and the other, which he terms the “oil dollar”, at 4.3 for all other transactions. Since 2005 the rate had been at 2.15 per dollar, which means that the devaluation is by 20.9% and 100% respectively. Chavez has suggested that the strength of the devaluation will enable Venezuelan businesses to be more competitive and will reduce dependency on importations. Critics, however, believe that the measure will cause a rise in inflation.

Chavez’ statement comes in the wake of reports that shopkeepers were closing their doors in order to change the prices of their products. Indeed, the most visible result of the decision thus far are the long queues in Caracas for electrodomestical products. A BBC Mundo correspondent in Caracas, Yolanda Valery, observed that “many shoppers are seeking televisions, fridges and other products before the devaluation is reflected in prices.”

Times of turbulence in the global economy can be tough for any country, but Argentina finds itself in a particularly difficult position. The strength of the domestic economy is uncertain, and the value for Argentina’s exports may soon drop. So how can Argentina protect itself from the slings and arrows of outrageous economic fluctuations?

Several risks are waiting to be addressed: tight credit in international markets (to the extent that Argentines can access them), lower prices and lower demand for Argentina’s exports, and difficulties stemming from the government’s exchange rate policy.

The first two risks stem from long-running trends as well as recent events. Global credit markets were awash in cheap money since the world’s major central banks slashed interest rates in the early years of this decade. Now, however, crises in the financial sector have tightened the supply of short-term loans, and long-term loans like mortgages and bonds are also starting to feel the pinch.

Though the Federal Reserve has been cutting interest rates sharply, other central banks have been too worried about inflation to follow suit. With tight credit, there will be less money available for investment in Argentina, both by foreigners and by locals. The economy will need to find new ways to attract financing at home and abroad.

Commodity prices were rising steadily during the same cheap money period, thanks to the rapid growth of emerging economies like China and India. Yet that trend, too, could be turning around. A global slowdown in economic growth means demand for crops, fuels, minerals and metals won’t grow as quickly in the next year or two, and there will be less pressure on prices. A major engine of Argentina’s economic expansion will slow down. To avoid dependence on commodity prices, the economy will need to diversify.

In the meantime, Argentina faces the risk of a continued decline in the dollar. The peso’s value against the dollar is already artificially low. With a lower dollar, maintaining that low rate will be costlier; the government would have to buy more dollars and print more pesos.

Buying more dollars won’t be easy, since the government’s budget surpluses will probably be eroded by a dip in economic activity. Moreover, the government may want to spend more or offer tax breaks in order to cushion that same dip. There will be less money in the coffers exactly at the time of greatest need.

Likewise, printing more pesos could spur faster inflation at an especially dangerous time. The rise in consumer prices may be running at an annual rate of 20% or higher, which is in a range where inflation becomes difficult to control. (Without reliable economic statistics, though, there’s no way to know how close this danger really is.)

These problems will occur to some degree even if the dollar simply stays put. Liberating the peso from its roughly 3-to-1 link to the dollar could be a necessary step, and a positive one as well. Inflation would fall as the peso rose on international markets. Exports might suffer slightly in the short term, but confidence in Argentina’s economy would rise. Investment from abroad and by Argentines would increase, most likely in industries that have been starved of funds since the crisis of 2001 and 2002.

Of course, adopting a floating exchange rate is not the only way for Argentina to become a more attractive target for investment. A serious fight against corruption is a surefire way to lure investors, as South Africa – a country of similar population and economic size – has found in recent years. Argentina currently ranks as the 105th-least-corrupt of 179 economies, below Mongolia and Tanzania, in the Corruption Perceptions Index compiled by Transparency International, a leading watchdog group.

An end to needless and unwieldy bureaucracy could also give investment a boost. In the World Bank’s Doing Business survey, Argentina sits 109th out of 178 economies for the quality of its entrepreneurial environment – below Ethiopia, Bangladesh and the Kyrgyz Republic. The country ranks 165th in the ease of licensing and 147th in the ease of hiring new workers. Clearly, there is room for improvement.

New investment would provide a foundation for long-term economic growth, and it would also help Argentina’s economy to diversify away from its commodity-heavy exporting industries. This diversification would be an enormous aid to Argentina’s resilience in times of global turmoil. Not by coincidence, it would also lay the foundation for a more stable and successful economic future.

Daniel Altman is the global economics correspondent of the International Herald Tribune. His most recent book, ‘Connected: 24 Hours in the Global Economy’, is available in Spanish from Ediciones Urano and in English from Pan Macmillan and Farrar, Straus and Giroux.