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ECONOMY | 18-01-2024 23:30

Why the Argentine peso is slipping through Milei’s fingers

Despite Javier Milei's best efforts, the gap between blue and official rates remains, and the peso has plunged by about a third against the dollar this year.

The respite that President Javier Milei brought to Argentina’s parallel exchange rate has proved all too short as the peso slides to fresh lows in the unofficial market used to skirt capital controls.

The currency has plunged by about a third against the dollar this year, reaching over 1250 per dollar and is now trading at over 50 percent less than the peso on the official market, up from a low of 11 percent on December 27.

Worse still, the renewed slide in the peso on the alternative market may be only just beginning, fuelling inflation that is already running at 211 percent a year, the highest rate in Latin America. Having chosen to backtrack on promises to dollarise the economy, Milei now needs to come up with a plan quickly to control the exchange rate and cap soaring inflation.

“The exchange rate gap will tend to widen from the second half of January, both because the official exchange rate will lag far behind inflation and because the blue-chip swap will weaken,” wrote the research and strategy team at local brokerage PPI, led by Pedro Siaba Serrate, in a report to customers. 

The Central Bank didn’t respond to a request for comment on the increased pressure weighing on the currency.

While Milei’s 54 percent devaluation after coming to office was well received by investors, markets are now demanding more. Here’s four reasons it may be hard to do.

 

Rate Hikes

Central Bank Governor Santiago Bausili slashed the monetary policy rate by 33 percentage points to an annual 100 percent after coming to office in December. 

The rate cut meant a lower yield on deposits: a disincentive for savers to keep their money in pesos in the bank and an incentive to dollarise their portfolios.

Given that February brings a seasonal drop in people’s need for pesos following the end of the festive season, “Argentina’s Central Bank will likely have to shift to a hawkish mode,” from its current position focused on diluting peso assets, PPI said.

 

Capital Controls

The peso started to come under further pressure this week after the first window to buy dollars for a broad range of imports opened on January 13. The authorities previously had a discretionary approach to providing dollars to industry — outside of essential products such as pharmaceuticals and fertilisers.

Local brokerage Facimex estimates that the Central Bank’s average daily purchase of dollars for its reserves will fall from its previous US$196 million to US$128 million through Feb. 11, then $90 million until March 12 and finally to zero in April.

 

Frozen Peso

After the Central Bank devalued the peso by 54 percent on December 12, it has allowed a two percent monthly decline in the currency under a crawling peg system. With consumer prices rising 25.5 percent on a monthly basis in December, that decline looks to be derisory. 

As a result, exporters will see a loss of competitiveness and sell fewer and fewer dollars on the official market, again undercutting Central Bank reserves and putting strain on the exchange rate.

 

Deregulation Bill

Presidential Spokesman Manuel Adorni has attributed the new exchange rate pressures to delays imposed by the opposition on the government’s economic deregulation bill. The measures include tax increases to reduce the fiscal deficit and deregulations to stimulate activity and ease the pressure on inflation.

The ruling party has a minority in both chambers and would need the support from other political forces to get the bill approved.

The jump in the dollar on the parallel market is just a “sample of what will happen to the Argentine currency if this bill is not approved,” Adorni said on Jan. 9.

 

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by Ignacio Olivera Doll, Bloomberg

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