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Weak Peso Worries Argentina

The sudden devaluation of the peso in the last month and a half – it has lost more than 11% of its value against the US dollar – now occupies the front pages of every newspaper in Argentina. It is feared there that the appreciation of the dollar could trigger higher inflation influence how Argentinians vote in October 22nds legislative elections.

“It does not bring good memories,” said Gabriel Zelpo, chief economist of Elypsis, a consultancy firm in Argentina. “The Argentineans associate the dollar rising with inflation rising. Several Argentine crises, including that of 2001, began this way. Nobody believes that an economic debacle like this is coming, but the Argentines are not accustomed to the exchange rate volatility and it surprises them that the Government of Mauricio Macri allows an escalation of the dollar in the middle of the electoral campaign. The US currency was close to breaking the 18-peso barrier Monday, but the sale of dollars from public banks prevented it and closed at 17.65, flat to Tuesday.

The economy of Argentina is largely dollarized. Argentinians hold savings in US dollars and the real estate market is also traded in the US currency. That is why any sudden exchange rate movement is accompanied by some trepidation. The Government is aware of the concern, as demonstrated at the last Cabinet meeting held on Tuesday. The rise of the dollar was one of the central themes of the meeting and Finance Minister Nicolas Dujovne assured those present that there will be no “peak inflation”.

Argentina had inflation of 40% in 2016, the second highest in the region, only behind Venezuela. The Government aims to reduce it this year to more than half and emphasizes that in recent months inflation has been declining. “We are facing a profound cultural change in the Argentine economy, which has to do with, once and for all, the severing of the dollar from the inflationary issue, and that is being achieved,” it told the media.

The IMF applauded the peso depreciation on Tuesday as it “helps correct the overvaluation of the currency.” It is also celebrated by the countryside. Much of Argentina’s agricultural production is destined for export and a low currency value increases its competitiveness against competitors, such as Brazil.

At the same time, the present situation harms wage-earners, who lose purchasing power in dollarized goods, such as housing. After years in which mortgage lending was restricted to higher-income families, Argentina is experiencing a mortgage boom, which has grown 34% in the last 12 months. But the volatility of the currency complicates the situation.

The current devaluation of the peso is not due to a single reason. In recent months, exchange rate mismatches have occurred because of external factors such as Brexit, Donald Trump’s victory in the United States, and Michel Temer’s judicial scandals in Brazil. Now, local factors are also weighing. The rise of the dollar coincided with Morgan Stanley’s decision to keep Argentina as a frontier market instead of ascending it to emerging markets status and with the candidacy of former President Cristina Fernández de Kirchner as senator shaking up the political situation. “Kirchner is in the run-up to the election and there are polls that place her first.

The growing demand for savings and tourism dollars, coupled with investors’ desire to reduce risk and return to dollarized assets are other reasons for the shift, according to economist Marina Dal Poggeto, executive director of Estudio Bein.

A month ago, all analysts predicted that the dollar would remain stable until after the election. Once again, Argentina again makes it clear that life is unpredictable.

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