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ECONOMY | 06-08-2023 19:04

Argentine markets brace for 20% currency devaluation after primary vote

Investors in Argentina are starting to brace for a 20 percent currency devaluation after the country’s August 13 primary election.

Investors in Argentina are starting to brace for a 20 percent currency devaluation after the country’s August 13 primary election, the first time they have converged around the timing of a long-expected policy change.

Futures currency contracts in the local market were pricing the peso at 329 per dollar by the end of August earlier this week, compared with an official rate of 277 per dollar. Pricing has since rebounded as the Central Bank stepped in. Yields on local peso bonds tied to the exchange rate have also dropped as investor demand for such assets grows to shield portfolios from losses. 

Inflation over 115 percent is pressuring the government’s cobweb of currency controls as the Central Bank runs out of dollars to continue propping up the peso. A newly announced agreement with the International Monetary Fund on Argentina’s US$44-billion programme put a limit on such interventions, while a US$7.5-billion disbursement partly hinges on what the Fund called “continued implementation of agreed policy action.” 

There’s little question the troubled South American nation will have to devalue its currency to cope with the mounting crisis. Economists from the country’s main opposition party say it’s inevitable, companies are rushing to refinance and investors are increasingly hedging in cash, bonds and futures as the Central Bank burns through reserves to support the peso. In a July report, the IMF estimated the real exchange rate gap was 15-20 percent.

Rampant inflation, falling reserves and speculation over a devaluation of the official peso have made the currency one of the worst performers in emerging markets this year.

The likelihood of an abrupt peso plunge hinges on the primary election results where Economy Minister Sergio Massa faces long odds to the presidency. Beyond triple-digit inflation, the economy is falling into a sharp recession this year as around 40 percent of the country lives in poverty. 

Early signs aren’t encouraging for Massa. Last Sunday, his Peronist coalition lost a gubernatorial election in Chubut province where it’s governed for 20 years. In Santa Fe province, the third-largest by population, his coalition lost the primary race by 35 percentage points. 

“If Massa gets less than 30 percent of the votes, the IMF will make him negotiate at the table alongside the opposition,” said Emmanuel Álvarez Agis, director of Argentine consulting firm PxQ and a former deputy economic chief in a prior Peronist government.

“Two at the table will want to devalue and only one won’t.” 

A spokesman for Argentina’s Central Bank declined to comment, while the Economy Ministry’s press office didn’t respond to a request for comment. A Central Bank official said investors have long betted on a devaluation in the futures market, declining further comment.

Carlos Melconian, a senior economic adviser to opposition presidential candidate Patricia Bullrich, said last Monday in a radio interview that “a currency devaluation is highly probable after the primaries.”

Marcos Buscaglia, co-founder of consulting firm Alberdi Partners, penned a column in La Nación newspaper Sunday that “it’s still likely that we vote August 13 and we devalue the week of August 14.” 

“The market is taking note of the relevance of the primary election date and is deciding to be covered,” said Mateo Reschini, senior research analyst at Inviu. 

 

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