The increased monetary pressure from circulating pesos is inevitably making its way into Argentina’s free foreign exchange markets, as the pandemic forces authorities to print more money and renew less of its snowballing debt.
Although Argentina’s official exchange rate is still devaluating at a managed pace due to massive government restrictions, from 60 to 66 pesos since President Alberto Fernández took office, the same is not true in parallel markets out of the government’s reach. The blue-chip swap rate and the bond-swap rate, which result from dividing the price of assets that trade at home and abroad, soared above 100 pesos per dollar for the first time this week, briefly touching 110 on April 15 before easing off today closer to 105 at the time of publication.
This means that the gap between official and free market rates reached a new high since restrictions on currency trade were re-imposed last year. In the short-term, the effects of this might not be seen by Argentines outside of financial markets, but it opens the door to all kinds of distortions and even potential shortages of imported goods in the long run.
So why is this happening at the moment? One explanation is the acceleration of fixed-term peso deposit withdrawals since the beginning of the lockdown to prevent a public health collapse from the coronavirus pandemic. Companies’ incomes have dropped dramatically in many cases, forcing firms to dip into their savings to cover their costs, and the same is true for individuals. Banks are not offering high rates for the renewal of fixed term deposits anyway, as they are currently flooded in pesos following the Central Bank’s decision not to renew part of its short-term debt in Leliq notes that is often used take liquidity off circulation.
In the short-term, the evolution of Argentina’s exchange rate will depend on the result of Argentina’s debt renegotiations following Economy Minister Martín Guzmán’s opening proposal today. In any case, however, Argentina’s debt bubble has not been fully unwinded yet, with liabilities in the Central Bank and the Treasury still massive even if foreign private bondholders accept the new offer, so more pressure against the currency is still likely to come in the longer term, particularly with the additional need for money printing that the pandemic will surely bring.