Argentina’s Economy Minister Sergio Massa pledged on Tuesday to unleash “all tools” to counter a dangerous slide in the peso currency, which has plumbed near 500 pesos per dollar in popular black markets amid wider economic fears.
The peso hit 495 on Tuesday in informal markets that have flourished as the official foreign exchange market is under tight controls. That is down from 400 pesos per dollar just over a week ago and compares to the official spot rate of around 221.
The 7% plunge on Tuesday followed Monday’s 4.6% daily decline, already the largest in nine months. The gap between the black and official rates of some 124% is the widest since last July, which warps prices and further fans high inflation.
The black market peso’s slump has pressured President Alberto Fernandez’s government to devalue the currency, something he has long resisted, and forced the central bank to increase intervention in the FX market that in March amounted to over $1 billion.
Devaluing the currency could help reduce the trade deficit and boost exports, including of grains, a sector which already has a preferential exchange. But it would also slash the real value of people’s savings and put pressure on local prices, especially of imported goods, pushing up an already sky-high inflation.
“Devaluation rumours have abounded in Argentina ever since Fernandez became president. Yet against what economic logic would suggest, it has not happened,” said Carlos de Sousa, EM debt strategist and portfolio manager at Vontobel Asset Management.
“I’d be very surprised if this government devalues the official exchange rate before the presidential election, but it’s probably one of the first things the next government will do.”
Fernandez said last week he will not run for re-election in October, which could give him cover to enact a very unpopular move that would exacerbate inflation, already running above 104% annualized.
STUCK IN NEUTRAL
Data on Monday showed monthly economic activity was flat in February even as it expanded 0.2% annualized, while last week the trade balance posted a surprise $1.1 billion deficit, further pressuring the currency.
It comes as a historic drought has hit key grains exports and fuelled a shortage of foreign currency.
“The sharp slowdown in activity seen at the end of 2022 is set to continue,” said Goldman Sachs’ Sergio Armella in a note to clients on Monday.
“A bad harvest, tight FX and import controls, and headwinds from the very high inflation and growing macroeconomic imbalances and distortions should keep real activity data weak through 2023.”
Economic activity is set to contract 2.3% this year, the worst performance among the G20 countries, with inflation seen ending the year above 100%, according to median estimates from economists polled earlier this month.
The weak data has further muddied the waters in Buenos Aires. As the peso has slumped, rumours have circulated about political pressure rising on Massa and Central Bank Chief Miguel Pesce, forcing officials into denials and shows of solidarity.
Argentina’s economy has struggled to build its dollar reserves as agriculture exports have dropped, to the point that the International Monetary Fund lowered an already low bar for reserves set as part of a $44 billion financing program.
JPMorgan said on Friday Argentina also failed its IMF program primary fiscal target for end-March, and said the government will request a formal waiver from the Fund “but also likely a relaxation of the annual 1.9% of GDP primary deficit target for 2023 in the upcoming review.”