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OPINION AND ANALYSIS | 28-04-2023 12:39

Argentina cracks as peso plunge raises risk of messy devaluation

Argentina is moving closer to a breaking point as the government’s desperate measures fail to halt a plunge in the peso, raising the risk of a currency devaluation.

Argentina is moving closer to a breaking point as the government’s desperate measures fail to halt a plunge in the peso, raising the risk of a currency devaluation that President Alberto Fernández pledged would never happen.

The government is said to be stepping up pressure on brokerages, demanding reports on trading in the parallel exchange market and launching an investigation into a firm that said a devaluation was imminent. The peso tumbled 13 percent last week in that alternative market used to skirt currency controls, while data showed consumer prices surging 104 percent in March, the fastest in three decades.

Argentina has been bouncing from crisis to crisis for most of the past 80 years, so its citizens are used to the economic chaos. But there’s a sense in Buenos Aires that things are about to get much worse. 

Policymakers say they need to rework the nation’s deal with the International Monetary Fund to speed up cash disbursements, but there’s been no indication the lender is willing to throw more money at the problem.

“Everything now is a just a matter of how quickly all the variables deteriorate,” said Fabricio Gatti, a portfolio manager at Novus Asset Management in Buenos Aires. “Traders realised that the current measures to contain inflation weren’t enough.”

That out-of-control inflation means nobody’s really sure how much anything costs anymore. In Buenos Aires, some restaurants have given up on printing prices on their menus as the black-market exchange rate changes at dizzying speed. Large transactions are increasingly done in dollars, but for day-to-day purchases, Argentines have to carry around wads of cash, with the largest banknote now worth just US$2, down from about US$21 four years ago.

The economic issues mostly boil down to a lack of hard currency — the country spends way more dollars than it takes in. Adding to woes, the country has been hammered this year by the worst drought of the century, removing any possibility of an influx of cash from agricultural exports before October’s presidential elections. 

Meanwhile, international reserves are drying up, calling into question how much longer the government can continue to defend the peso from an all-out collapse.

 

Market turmoil

The most recent bout of market turmoil began last week, when traders started selling peso assets after government data showed inflation accelerating much faster than forecast. Unfounded rumours swirled over a devaluation of the official exchange rate, forcing Economy Minister Sergio Massa to deny the plans in a voice message he sent to a WhatsApp group chat as the peso sank. Overseas dollar bonds also tumbled to their lowest this year, reaching some 25 cents on the dollar. 

The government’s response to all this is looking increasingly desperate. Argentina’s securities regulator is putting pressure on local brokers to limit trading in parallel markets, asking them to provide records on any such activity, according to people familiar with the matter. Another broker was compelled to issue an apology on social media for spreading rumours about a currency devaluation, after the regulator opened an investigation into the incident, another person said. All asked not to be named discussing sensitive information. The regulator and the government declined to comment. 

Argentina’s Central Bank raised its benchmark rate Thursday by 10 percentage points to 91 percent, up from 47 percent a year ago. Monetary policy tightening has proven ineffective so far.  

 

IMF deal

Massa also notified the IMF this week that the government intends to intervene more in local financial markets, according to three senior government officials with direct knowledge of the conversations. 

The move puts Argentina’s IMF deal at risk of going off track, according to one of those officials, who asked not to be identified speaking candidly about sensitive matters. That could jeopardise the IMF’s next disbursement of US$3.9 billion scheduled for June, though both sides are discussing the possibility of a larger transfer, possibly by moving up payments that had been planned for later in the year. 

“It’s very likely that the programme will go off track at the next review,” said Alberto Ramos, the head of Latin America research at Goldman Sachs Group Inc. “With the election approaching, it could well be that the IMF calls a timeout.” 

In addition to the IMF plan, officials are also tapping a US$24-billion currency swap line with China to pay for about US$1.8 billion of imports between April and May. The Economy Ministry also created multiple exchange rates for soybeans, wine and other key exports in a bid to get producers to sell and bring in dollars, to little avail.

The Economy Ministry’s Press Office didn’t provide comment. An IMF spokeswoman said in a statement that discussions with the government on the next review of the programme “are advancing in a constructive manner.”

 

History of turmoil

Argentina is a nation accustomed to financial turmoil. Many local savers immediately convert their peso pay-cheques into dollars, buying greenbacks in Buenos Aires’ widespread — but technically illegal — back-room exchange houses. Or they buy cryptocurrency through one of a dozen homegrown exchanges.

A common strategy besides saving in dollars is spending every last peso before inflation accelerates further. Stores seeking to take advantage of this often advertise liquidation sales, urging customers to buy now before prices inevitably surge again.

Argentines also haven’t stopped packing cafés, bars and restaurants in Buenos Aires to blow their pesos, and discontent over the current political situation can be overheard at many tables, especially at the chic venues that cater to the city’s business class. Polls showed Fernández’s approval rating dropped below 20 percent earlier this year amid expectations for another recession before 2024. 

“We project year-over-year inflation to end 2023 around 100 percent, with risks tilted to the upside. A number of factors will likely keep inflation running hot in the coming quarters, including inertia, pent-up pressures from misaligned currency and regulated prices, and lax fiscal and monetary policies," said Adriana Dupita, Bloomberg's economist for Brazil and Argentina.

Beyond international issues like the Covid pandemic and war in Ukraine, domestic problems have plagued Fernández’s term. His left-leaning Peronist coalition suffered from infighting between him and Vice President Cristina Fernández de Kirchner over economic strategy almost since his inauguration in 2019. The government never came forward with an economic plan seen as credible by investors.

Last week, Fernández ruled out running for a second term.

For Argentines like Carolina Serradilla, the owner of Obrador de Panes y Galletas, a bakery and café in the capital’s historic San Telmo neighbourhood, all this is reminiscent of past crises. She graduated from her pastry chef programme during the country’s 2001 collapse, and doesn’t see any reason for near-term optimism. She also isn’t convinced any of the presidential candidates will be able to fix the mess.

“Argentina is never going to change,” she said. “The only thing we can do is enjoy life.”

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by Scott Squires & Ignacio Olivera Doll, Bloomberg

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