Argentina’s Peso Depreciates Sharply After Currency Controls Lifted
Move comes a day after government announced lifting of controls to kick-start economy
ENLARGE
People walk past a bureau de change showing the U.S. currency’s value in Buenos Aires on Thursday. The Argentine peso depreciated sharply a day after the government announced it was lifting currency controls. Photo: eitan abramovich/Agence France-Presse/Getty Images
By
Taos Turner
Updated Dec. 17, 2015 3:30 p.m. ET
18 COMMENTS
BUENOS AIRES—Argentina’s peso lost nearly a third of its value against the U.S. dollar Thursday, a day after the new government of President Mauricio Macri
announced it was lifting currency controls to attract investors and kick-start the economy.
Within minutes of trading, the peso weakened to 13.9 per dollar from 9.8 the previous day, its biggest one-day slide in decades. The decline will hit multinationals that operate in Argentina and ordinary Argentines who will see the value of their savings slashed in dollar terms.
Economists had expected Argentina’s currency to weaken following Wednesday’s news that the government was ending a four-year policy of strict limits on the sale of U.S. dollars, a policy that restricted imports, hurt economic growth and spawned a thriving currency black market.
The peso moved close to the previous black-market rate around 14.50 to the dollar.
The key in coming days will be whether the Argentine central bank can prevent the currency from sliding further and entering an unpredictable tumble. To keep the lid on price hikes and attract investment, Argentina’s central bank on Tuesday raised its benchmark rate as high as 38%.
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“We are still going through the process of price discovery,” said Goldman Sachs economist Alberto Ramos. “The fact that there wasn’t a crazy move early in the morning to 15.50 or 16, and the central bank had to show its hand very quickly, is in itself evidence that they prepared the ground relatively well and communicated the move relatively well to make this a successful experiment.”
Argentina’s central bank said it didn't intervene to support the peso on Wednesday.
According to one currency trader, volume was low in U.S. dollar-peso trading due to problems that banks and other market makers had in reprogramming their operating software to accommodate new central bank regulations. The trader said volume and demand will increase after these adjustments, adding he believes the local currency will then fall further.
Meanwhile, other economists were also hopeful the move would prove a success.
“I don’t expect to see strong pressures on the local currency over the short-term, as an adjustment in the exchange rate to 14 or 15 pesos per dollar has been already assimilated,” said Jose Luis Machinea, who served as Argentina’s economy minister from 1999 to 2001.
“A lot will depend on inflationary pressures over the next two months, as the government has implemented several policy measures at once that could have a strong impact on prices, just as unions prepare for wage negotiations early next year,” he added.
Many ordinary Argentines, accustomed to their country’s long history of financial booms and busts, said they anticipated the decline, which is expected to raise the country’s 25% inflation rate by making imports more expensive in local currency terms.
“Even at 14 pesos (the) exchange rate is still cheap—that’s what it costs to buy a bar of chocolate,” said José Luis Mata, an immigrant from Venezuela who works at a record store. “Like it or not prices are going to go up here. But I’ve seen how currency controls ruined my home country and getting rid of them will help Argentina’s economy. “
Retailers and their suppliers have been marking up prices in anticipation of a devaluation.
“We raised our prices by 40% before the exchange-rate changes so we wouldn’t lose money,” said Marcela Ledesma, 48, who runs a retail store selling imported orthopedic equipment such as wheelchairs and walkers.
Retail prices rose 1.2% in the first week of December alone, the fastest clip since Argentina devalued the peso by 20% in January 2014, according to Elypsis, an economic research firm.
In the days since he took office, Mr. Macri has
moved quickly to undo the economic legacy of 12 years of populist policies by his predecessors,
Cristina Kirchner and her late husband Nestor. The pair dramatically expanded the government’s role in the economy, including nationalizing key companies, expanding subsidies, and launching price controls.
Mr. Marci’s administration has
eliminated most farm export taxes, cut personal income taxes, begun restaffing Argentina’s discredited statistics agency, and replaced the central bank president. But scrapping currency controls is the biggest move so far, and one that will shape the coming months of his administration.
The decision to let the peso float is aimed at sparking growth by getting Argentina’s giant agribusiness sector to start exporting again due to a more competitive exchange rate. Those exports will bring badly needed dollars to the country. It is also aimed at giving a jolt of confidence to investors.
But the move is also fraught with risks. For many in Latin America, the price of their currency in dollars is seen as a key gauge of economic well-being--and is as widely watched as gasoline prices in the U.S., a key gauge of economic well-being.
For many Argentines, their savings will have been cut dramatically in dollar terms.
“The losers from this are Argentine consumers that will now face a higher import bill, foreign investors that have assets in Argentine pesos—they’re the textbook losers—and Argentine companies that have dollar debts but revenue streams in Argentine pesos,” said Neil Shearing, chief emerging markets economist at Capital Economics.
Argentina does not have deep dollar reserves to defend the peso: Over the past four years, the central bank’s foreign currency reserves have plummeted to around $24 billion from more than $52 billion. Economists say the bank’s real net reserves are far lower considering liabilities like money owed to importers and outstanding bond payments.
To ease those fears, Finance Minister Alfonso Prat-Gay said Wednesday that Argentina is on track to obtain between $15 billion and $25 billion in fresh cash from a combination of agreements with international banks, grain exporters and China’s central bank. He said grain exporters have agreed to turn over $400 million a day in the coming weeks from farm sales.
Still, one of the underlying problems for the country’s currency, in addition to inflation, is Argentina’s gap between what it spends and takes in—a shortfall equal to about 7% of annual economic output. That difference has until now been made up by printing money, fueling inflation. Mr. Macri has promised to trim the deficit and has already announced cuts to fuel subsidies.
