© Reuters. FILE PHOTO: An Argentine one hundred peso coin is shown in this pictogram taken September 3, 2019. REUTERS/Agotin Markarian/Illustration
By Rodrigo Campos
NEW YORK (Reuters) – Argentina’s Economy Minister Sergio Massa vowed on Tuesday to unleash “all the tools” to counter a dangerous slide in the peso, which has fallen about 500 pesos to the dollar on popular black markets amid broader economic concerns.
The peso hit 495 on Tuesday in informal markets that thrived as the official foreign exchange market is tightly regulated. That’s less than 400 pesos to the dollar from just over a week ago, and compares to the official spot rate of 221 pesos.
Tuesday’s decline of 7% followed a daily decline of 4.6% on Monday, already the largest in nine months. The gap between the official and black rates of around 124% is the widest since last July, distorting prices and adding to high inflation.
(Graphic: Argentina: Pain of the Peso – https://www.reuters.com/graphics/ARGENTINA-CURRENCY/klpygzbggpg/chart.png)
The peso’s decline on the black market has put pressure on President Alberto Fernandez’s government to devalue the currency, something he has long resisted, and forced the central bank to step up intervention in the foreign exchange market that in March amounted to well over $1 billion.
Devaluation can help reduce the trade deficit and boost exports, including grain, a sector that already has preferential exchange. But it will also lower the real value of people’s savings and put pressure on domestic prices, especially of imported goods, driving up already high inflation.
“Rumors of devaluation in Argentina have abounded since Fernandez became president. But contrary to what economic logic might suggest, it has not happened,” said Carlos de Souza, emerging market debt strategist and portfolio manager at Vontobel Asset Management.
“I would be very surprised if this government lowered the official exchange rate before the presidential election, but that would probably be one of the first things the next government would do.”
Fernandez said last week that he would not run for re-election in October, which could give him cover to make a highly unpopular move that would exacerbate inflation, which already exceeds 104% annually.
Stuck in neutral
Monday’s data showed that monthly economic activity was flat in February even as it expanded 0.2% annually, while last week’s trade balance posted a surprise deficit of $1.1 billion, adding to the pressure on the currency.
It comes as a historic drought hit key grain exports and fueled a shortage of foreign currency.
“The sharp slowdown in activity seen at the end of 2022 is set to continue,” Sergio Armella said in a note to clients on Monday.
“Bad harvests, tight controls on foreign exchange and imports, headwinds from very high inflation and growing macroeconomic imbalances and distortions should keep real activity data weak through 2023.”
Economic activity is set to contract by 2.3% this year, the worst performance among G20 nations, with inflation ending above 100%, according to the median estimate of economists polled earlier this month.
(Graphic: Argentina: Inflationary Vortexes – https://www.reuters.com/graphics/ARGENTINA-ECONOMY/zgpomndbrpd/chart.png)
Poor data has muddied the waters in Buenos Aires. As the peso fell, rumors circulated about increasing political pressure on Massa and central bank chief Miguel Pesque, forcing officials to deny and show solidarity.
Argentina’s economy has struggled to build up its dollar reserves as agricultural exports plummet, so much so that the International Monetary Fund has already lowered the minimum reserves set as part of a $44 billion financing program.
JPMorgan (NYSE:) said on Friday that Argentina also missed the primary fiscal target of the International Monetary Fund’s program for the end of March, and said the government would seek a formal exemption from the fund “but possibly also an easing of the annual primary deficit target of 1.9% of GDP for the year.” 2023 in the next revision”.