Argentina Lacks Options to Defend Peso

With interest rates sky-high and the economy heading for recession, Argentina’s President Mauricio Macri is running short of options to stem a slide in the peso, economists say, leaving the battered currency at the mercy of volatility in emerging markets.

Macri’s government has already taken a series of measures to restore confidence in the peso since it came under pressure in May, reviving memories of a painful 2002 economic crisis in Latin America’s third-largest economy, Reuters reported.

Argentina’s central bank hiked interest rates to 40% in May, and Macri sealed a $50-billion deal with the International Monetary Fund in June—removing the need for outside funding and briefly steadying the peso. His government has since announced more than $2 billion in budget savings.

But jitters returned in recent weeks as Turkey’s financial crisis roiled emerging markets, after Turkish leader Recep Tayyip Erdogan clashed with US President Donald Trump. Emerging market investors were already unnerved by the US-China trade tensions and the Federal Reserve’s tightening.

Confidence in Argentina was also shaken by a major corruption scandal in the construction sector, expected to damage economic growth already hit by a drought that crippled vital agricultural production.

The peso has tumbled 8.5% against the dollar in the past two weeks despite Argentina’s central bank again hiking rates to 45%. On Wednesday, the bank was forced to sell $781 million in reserves to support the peso, before tightening reserve requirements a day later.

A major challenge for Argentina is that interest rate rises have limited impact in fighting inflation because consumers and businesses use little credit after years of financial crises, economists say. Inflation jumped to 31% in June.