BUENOS AIRES, Aug 28 (Reuters) - Argentina’s central bank is reducing the supply of scarce dollars to manufacturers two months ahead of a presidential election to ensure more are available for the nation’s savers, hampering the import of parts and disrupting factory production lines.
Tough capital controls mean importers operating in Latin America’s No. 3 economy are restricted to how many dollars they can buy each month, while savers have to apply to the tax agency to purchase greenbacks.
Two sources in the automaking industry told Reuters that in the first three weeks of August the financial regulator cut the sector’s dollar allowance by almost a third. The head of an electronics assembly firm said his allocation had also fallen this month.
The central bank and industry ministry declined to comment.
The timing of the cuts for industry coincides with a spike in dollars available for the wider Argentine population, whose faith in the peso currency evaporated after a string of economic crises and who routinely seek hard currency ahead of elections to protect their savings. That is because past political change and periods of economic turmoil have led to hyperinflation, big devaluations and, in 2001, a run on banks.
The central bank’s actions risk undermining a fragile recovery in Argentina’s industrial sector, which grew for the first time in nearly two years in June as an economic recovery underpinned by high public spending shows sign of taking root.
PRODUCTION “SEIZING UP”
Car factory workers are already working reduced hours as companies grapple with a drop in demand from Brazil, which imports more than half of all vehicles shipped by Argentina, and a sustained squeeze on dollar supplies could force firms to reassess production plans.
“The problem is there just aren’t enough dollars in the system,” said Leandro Liberman, director of Grupo Liberman which assembles washing machines and mobile phones in Argentina’s southern Tierra del Fuego province.
The electronics sector has a quota of $300 million per month, according to the industry ministry’s website. The move to reduce this in August would exacerbate a supply shortage of mobile handset models, Liberman said.
“We’re not receiving our quota of dollars so we can’t bring in parts, and production is seizing up,” said Liberman, who declined to be specific about the size of the cut.
One of the automaker sources said the industry was operating at 60 percent of installed capacity.
“If this dollar crunch continues, companies will have to review their import plans and production plans,” said the source, who declined to be identified, reflecting the reluctance of companies to publicly criticize the government.
A second automaker source said his company was unable to produce some models because of difficulties importing parts.
Separately, Juan Cantarella, who heads an umbrella group of auto parts companies, said the government’s restrictions on imports are hurting export revenues. The auto parts companies need to import some of their components and materials.
“We tried telling the government its policy is counter-productive, that $20 million in imports can generate exports of $80 million,” said Cantarella. “They didn’t get back to us.”
The dollar crunch confronting importers is just one currency headache that the next president will have to tackle.
The shortage stems from the country’s absence from global debt markets after a record default in 2002. President Cristina Fernandez has had to eat into reserves to finance restructured debt payments, pay for energy imports and shore up the peso.
The leftist leader imposed capital controls in 2011 to prop up the dwindling reserves, restricting importers’ access to dollars, capping how many dollars savers can buy and preventing foreign firms from sending hard currency profit home.
At stake in the Oct. 25 election is the direction Argentina will take after Fernandez’s interventionist policies.
Leading opposition candidate Mauricio Macri, the financial markets’ favorite, promises to scrap state controls on the peso, allow it to float freely and remove barriers to buying dollars.
Ruling party candidate Daniel Scioli talks of a more gradual shift toward open market policies. He has defended the central bank’s role in controlling the exchange rate but his advisors also say industry must have access to dollars to bolster output.
In the meantime, Argentine importers are struggling to persuade suppliers that they can honor their bills.
Importers owe suppliers $8.1 billion - or almost a quarter of the central bank’s total foreign reserves - in outstanding debts, according to the Chamber of Argentine Importers.
“It can’t continue,” said Liberman. “No country in the world can sustain policy like this in the medium- and long-term.”
The government appears to have given extra priority to the demands of Argentines seeking to shield themselves from a possible devaluation of the peso.
Tax agency data shows that in the first 24 days of August $576 million was sold to savers, more than double the amount sold in the whole of the month a year earlier.
“This government is sacrificing economic activity to avoid a bigger fight with savers,” said Maximiliano Castillo, a former central bank economist.
The dollar shortage compounds the impact of weak demand in Brazil. Vehicle production in Argentina in the first seven months of 2015 fell 11.8 percent on the year-earlier period, extending a 22 percent slide in 2014 from 2013.
Car makers operating in Argentina include General Motors , Ford Motor Co, Honda Motor Co Ltd, Toyota Motor Corp, Volkswagen AG, Peugeot SA and Fiat.
One automaker executive said workers are on reduced shifts in some factories.
Labor laws make it costly to fire workers in Argentina and the Fernandez government has also pressured manufacturers not to sack employees through the slowdown.
Writing by Richard Lough; Editing by Martin Howell