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ECONOMY | 19-04-2023 12:31

Argentina’s 'blue dollar' hits 420 – the reasons behind exchange rate turbulence

Argentina’s complicated exchange rate spectrum was hit by further turbulence on Tuesday. The reasons behind the instability, according to the experts.

Argentina’s peso is weakening on exchange markets, especially the unofficial ‘blue dollar’ and financial (MEP and CCL) rates, with analysts attributing the turbulence to a cocktail of elections in October, dollarisation proposals by libertarian lawmaker Javier Milei and instability from the new ‘dolár agro.’

The illegal ‘dolár blue’ reached a new record high of 421 per greenback on Tuesday, while the MEP dollar traded at 411 and the CCL at 425. Economists tend to focus on the latter two exchange rates as key indicators.

According to F2 Soluciones Financieras analyst Andrés Reschini, inflation is more closely linked to financial dollars such as the MEP and CCL, although the illegal one has a greater impact on the general outlook.

During the first quarter of 2023, there has been a significant increase in Argentina’s inflation rate, which has increased market volatility. Larger amounts of money-printing, in main due to the government’s new ‘dolár agro’ (almost a third version of the ‘soy dollar,’ but reaching more products), has further aggravated this situation.

Once again led to a delayed impact in the exchange rate, raising concerns among economic actors as they seek to adjust their strategies to cope with market volatility.

For economist Pablo Tigani, the turbulence is in part due to the proposals of the presidential pre-candidates, such as those from libertarian lawmaker Javier Milei and opposition PRO party hopefuls Patricia Bullrich and Horacio Rodríguez Larreta. 

Tigani explained that Bullrich has implied that there will be no investment and that Argentina will have to get by with savings, "which sounds like a corralito.” For his part, Milei suggests alternatives such as closing the Central Bank, which would cause a run on savings, and a ‘bonex plan,’ a swap of long-term bonds that would quickly lose value for people who have existing deposits.

"Rodríguez Larreta, for his part, believes that the market can be freed and that it can set the value of the dollar, but this could be very dangerous because the value of the dollar could have no ceiling and workers' salaries would be pulverised," Tigani told Perfil

Maximiliano Ramírez, a former undersecretary of economic programming, agrees with Tigani. He believes that the instability is also due to the speculative tone of companies and people seeking to protect themselves from political proposals such as dollarisation or a jump in the exchange rate.

Regarding the options available to the ruling Frente de Todos coalition, should parallel exchange rates soar even further, Pablo Tigani considered that "this government is one of patches [short-term measures] and, if what it continues to do is to put patches, regulations and more controls, the parallel market will be a way out for people who cannot get dollars, so it also leaves an open end.”

He concluded: "In every case, what the soaring dollar generates is a fall in consumption, in investment, and any unification with a high dollar triggers the debt, because it is contracted in dollars, and the debt-to-GDP ratio can become unsustainable. According to IMF criteria, any country with more than 70 percent debt over GDP becomes unsustainable.”

"The dollar's surge could be divided into parts,” speculates Ramírez, breaking down recent turmoil. “First, we see a big jump in the nominal rate with an inflation figure for March of 7.7 percent. Then, we have to take into account that the crawling peg that the BCRA did in the first part of April also stands at seven percent. This added to the last RIPTE [Remuneración imponible promedio de los trabajadores estables] data that was above seven percent and we already have some factors that justify the rise in exchange rates.”

 "What can be seen in the latest economic data is that the nominal rate went from six percent at the end of February to seven percent in March, so relative prices were distorted, particularly that of parallel dollars," added the former official.

"We are seeing an upward dynamic in exchange rates that is being accommodated by the new levels of nominality," said Ramírez.

"Then there is the part of the soybean dollar and regional dollars where we are seeing that the liquidation is coming in much, much lower than expected. This is due to an effect of relative price accommodation and a supply of dollars that does not end up entering, which generates some noise," the expert told Perfil.

For economist Salvador Di Stefano, "we are giving a death sentence to investment in pesos, inflation is higher than interest rates, the wholesale dollar is behind, and the implicit rate in the futures market is at 126 percent per annum.”

"It is time to buy things, owe pesos and dollarise portfolios," he said in a report.

Santiago Escobar

Santiago Escobar

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