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ECONOMY | 12-11-2020 16:42

Argentina goes all-in to cut record gap with parallel peso

Argentina is resorting to all necessary means to reduce the gap between its official and parallel exchange rates.

Argentina is resorting to all necessary means to reduce the gap between its official and parallel exchange rates.

South America's second-largest economy has employed a combination of orthodox and unusual measures to recover a monetary imbalance that has reached record levels. The more traditional methods include slowing the issuance of money, raising interest rates and promising not to be financed by advances from the Central Bank. The government has also pressured traders to limit their movements and sold its own dollar bond holdings to impact the peso.

So far, the mix of measures seems to be working. The gap between the official rate and the parallel rate, known as cash with settlement, has narrowed to 87 percent after it peaked at 130 percent on October 22.

"The gap continues to narrow as a result of a combination of pressure and orthodoxy," said Fernando Marull, an economist and director of FMyA, a consulting firm in Buenos Aires. "The government is sending signals and at the same time it is intervening in the market, through the sale of bonds, but in a very moderate way."

Part of that effort has been the Central Bank's sale of its own dollar bond holdings. The monetary authority has sold about US$100 million in local dollar bonds since October 22 and still has the capacity to sell another US$7.7 billion, according to Marull estimates.

The government has been under increasing pressure to close the gap between rates. The gap had widened to its widest level in more than 31 years after capital controls designed to protect the nation's dwindling foreign reserves only increased demand for dollars. While analysts have said that the gap suggests that a devaluation of the official rate is imminent, President Alberto Fernández, has publicly said that he is opposed to taking that step.

The large number of remaining restrictions also set a threshold on the recent appreciation of the peso, traders say. Limits on operations and a tax on dollar purchases are among the measures that could stop the recent rally, according to Carolina Schuartzman, director of sales and brokerage at Columbus Zuma in Buenos Aires.

"Despite some steps in the right direction in recent weeks, I don't see much room for cash liquidation to continue to strengthen," he said. "There is no room to remove the remaining restrictions, and it will take time for the market to regain its confidence in the economic team."

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by Ignacio Olivera Doll & Scott Squires, Bloomberg

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