World Economy
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Argentina Curbs Peso’s Fall

Argentine central bank forecast an exchange rate  of 24 pesos per dollar for the year.Argentine central bank forecast an exchange rate  of 24 pesos per dollar for the year.

Argentina likely stopped a run on the peso with a massive rate hike and lower fiscal deficit target, though high inflation and large amounts of debt are lingering risks, economists said.

Treasury Minister Nicolas Dujovne told local radio over the weekend the government had avoided a crisis with coordinated measures by the central bank and economic team, though he acknowledged Argentina would pay for the measures with lower economic activity, Reuters reported.

 “When someone takes measures on the scale we took them he chooses which costs to avoid and which costs to pay,” Dujovne said on Radio Mitre. “We chose to avoid a crisis ... Later undoubtedly higher rates can result in lower activity but that also depends on how long the rates last.”

The peso closed 5.12% stronger at 21.88 per dollar on Friday after the central bank hiked its benchmark interest rate to 40% and Dujovne lowered the fiscal deficit target but the peso remained 6% weaker than a week ago.

The peso’s slump to all-time lows and talk of crisis last week made Argentines nervous as many still have strong memories of a 2001 bank run that led to years of hyperinflation, political instability and poverty. The local Merval stock index, one of the best performing in the world last year, fell 2.6% on Friday.

“We believe the peso will calm down in the next few days, although it will not necessarily be free of volatility,” local consultancy Ecolatina said.

The 40% rate “can temporarily support an exchange rate of 21.6, but the heavy positioning, loss of credibility, and reputational cost make 22 pesos a new fair rate in our view,” BTG Pactual economists said in a note.

The bank forecast an exchange rate of 24 per dollar for the year end and raised its annual inflation forecast to 24%—far higher than the central bank’s target of 15%.

  Credibility Issue

The issue of credibility is crucial to Argentina, which returned to international capital markets after settling a dispute with holdout creditors after center-right President Mauricio Macri took office in late 2015, ending 12 years of leftist governments.

Argentina even sold an oversubscribed century bond last year to investors who had praised his policies. Latin America’s No. 3 economy still lacks an investor credit rating and is classified as a frontier rather than an emerging market by Morgan Stanley.

Before announcing three emergency rate hikes starting on April 27, the bank tried to prop up the peso by selling nearly $8 billion in dollar reserves on the spot market since March. Friday was the first day the bank did not intervene in two weeks.

“The peso is going to stay at these levels, always attentive to what happens abroad,” said economist Santiago Lopez Alfaro, of Delphos Investment. “If it stays constant, then we have reached a new equilibrium point... I do not expect much intervention with these rates.”

Lopez said economic growth would likely be closer to 2 or 2.5% this year, below the government’s initial forecast of 3%, because of higher rates as well as a punishing drought that hurt soy and corn output in the world’s No. 3 exporter of both.

 

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