Argentina’s manufacturing industry faces a triple challenge: new measures to expand import liberalization, Brazil’s currency devaluation, and the appreciation of the peso. The Economy Ministry has hastened the elimination of the PAIS tax, and the Central Bank is preparing to continue dismantling the foreign trade restrictions. Meanwhile, the currency of Argentina’s main trading partner suffered a new setback, with an accumulated 20% decrease in the last 12 months. The services account, the balance of service operations through the foreign exchange market, showed a deficit of over US$744 million in October.

The strong volatility of Brazil’s financial markets dominated weekend conversations in the Argentine business community. Brazil is Argentina’s main trading partner, the largest destination for industrial exports, and an unquestionable reference among emerging countries.

Finance Minister Fernando Haddad pledged to cut spending by almost US$12 billion in two years, but the announcement did not convince the markets. Haddad also confirmed an income tax exemption for those earning up to US$840 a month and an increase for those earning more than US$8,400.

The ‘caipirinha effect’ deepens

The dollar soared by 3.5% in two days and surpassed 6 reais for the first time in its history on Thursday. It somewhat recovered on Friday, but uncertainty remains. The bilateral real exchange rate finds the peso in its moment of greatest appreciation in history. The largest tourism agencies speak of an “invasion of Argentines” in Rio de Janeiro. Brazil has never been so cheap.

At the end of the week, the Argentine Central Bank published its October exchange balance. Even though the financial exchange rate was AR$500 below the tourist dollar, the services account continued to deteriorate. It showed a US$744 million deficit. From May to now, the negative balance has worsened every month.

But tourism is not the only sector watching the events in the neighboring country with dismay. Argentine industry has a fundamental buyer and competitor in Brazil, which strengthens its own and third markets. Auto parts, metallurgy, food, and beverages are some of the sectors that could be affected.

Goodbye, trade restrictions

The “caipirinha effect” arrives right in the middle of the import opening process. The government is making accelerated progress in dismantling trade restrictions. From access to the foreign exchange market in four installments, it has gradually advanced to a normalization that now allows paying imports in 30 days.

December starts with the PAIS tax as an anecdote of the past. Its elimination is another way of making imports cheaper and one less protection for local manufacturers who have already seen the disappearance of non-automatic licenses, customs criteria values, differential tariffs on some products, and quality standards on others.

“Every week, a trade restriction is relaxed. Sometimes it is more visible and sometimes less, depending on the impact of the transaction it affects,” a top official of the economic team explained to the Herald’s sister publication Ámbito. One of the next steps would be allowing cash payment for purchases abroad, which now only applies to a handful of specific sectors, such as energy.

The ‘super peso’ advances

All this is taking place amid a risky process of exchange rate appreciation. The multilateral real exchange rate index has already reached the levels prior to last December’s devaluation. The businesspeople of the Argentine Industrial Union claim that local production is becoming more expensive because the so-called “Argentine cost,” i.e. the tax burden, does not go down.

The concern about the triple impact—the devaluation of the real, appreciation of the peso, and more import liberalization—has several focuses: the possible loss of export markets due to the fall in competitiveness, lower sales to Brazil due to the risk of a recession, and the massive arrival of surplus products from the neighboring country for the same reason.

Apart from foreign policy issues, Argentina was not and is not isolated from the world, much less from its main trading partner, from where a crowd of Botafogo and Atlético Mineiro fans arrived to watch the final of the Copa Libertadores. Those fans, who mockingly tore up Argentine peso bills a year ago, complained about the local prices this weekend in media interviews.

Originally published on Ambito