In another tumultuous day for the Argentine economy, the peso hit an all-time low of $31.60 to the dollar yesterday, with a record close of AR $31.50 wholesale and AR $32.06 retail to the American currency. To improve the situation, monetary policymakers are now attempting to renegotiate the terms of Argentina’s bailout agreement with the International Monetary Fund.
— BCRA (@BancoCentral_AR) August 28, 2018
This year, the peso has weakened by 40.79 percent, regularly hitting historic lows against the dollar. Although gradual depreciation had been expected, due to foreign exchange restrictions and currency overvaluation under former President Cristina Fernández de Kirchner, the Argentine currency suffered a spectacular fall in April amid market concerns over the government’s ability to control inflation and economic output contraction due to a drought that crippled Argentina’s agricultural sectors this year.
The peso’s devaluation shows no sign of halting, despite national monetary agencies taking urgent measures to prevent it sliding further. Yesterday the BCRA, Argentina’s Central Bank, auctioned off US $200 million of its reserves in two separate currency auctions, offering US$ 300 million in each auction.
In an effort to calm the markets in the face of the peso’s devaluation and rampant inflation, the BCRA increased interest rates and sold billions of dollars in reserves to protect the peso. This year alone, the BCRA has sold a total of US $12.881 billion on the foreign exchange market, resulting in a sharp decline in reserves, which has only increased with renewed interventions as the peso continues to stumble.
No one expected Argentina’s peso to plunge against the dollar as quickly as it did in April. See the country's economy in five charts: https://t.co/pjr4BFptCq by @ReutersGraphics @cohenluc @Han_Miami pic.twitter.com/mmkxQ66ant
— Reuters Top News (@Reuters) August 28, 2018
On Monday, Minister of the Treasury Nicolás Dujovne told international news agencies that Argentina’s economy would contract 1 percent this year, despite previous estimates this year predicting a 0.4 percent growth in GDP. However, he estimates that it will bounce back with at least 1.5 percent growth next year.
He also confirmed that Argentina had requested that the IMF release US $3 billion from the US $50 billion stand-by financing agreement signed by both parties in June. The IMF will release funds quarterly providing that the government complies with financial objectives such as lowering inflation and slashing the fiscal deficit.
“We have agreed with the IMF to forward all the funds necessary to guarantee compliance with next year’s financial program,” President Mauricio Macri said in televised address. “This decision aims to eliminate any uncertainty that was created before the worsening of the international outlook.”
However, the peso’s continued fall against the dollar have done little to assuage the market’s fears, as investors voice concerns that Argentina may once again default on its loan repayments. In the financial crisis of 2001, Argentina experienced the largest-ever sovereign debt default in history, and then spent 15 years embroiled in legal battles with American hedge funds, the so-called “vulture” funds, only resolving this dispute in 2016. Nearly 70 percent of Argentina’s debt is in foreign currency, which makes it particularly vulnerable and a risky choice for investors.
In an attempt to avoid default, the Government is currently attempting to negotiate with the IMF to increase the funds available in their stand-by agreement by between US $15 billion and US $20 billion, bringing the total credit line to around US$ 65 billion. According to the Government, the financial slump next year is around US $7.5 billion, so these funds would dispel investors’ doubts about whether Argentina has the necessary funds to comply with the maturity of next year’s debt and avoid a default.
Although Cronista reported yesterday that sources from the IMF had shut down the possibility of a further bailout, today new sources are claiming that the IMF is considering the proposal. La Nación announced today that sources from within the international agency had confirmed that negotiations are taking place with “significant advances,” but have declined to disclose more information until the end of the negotiation process.
One of the problems faced is that BCRA has continued to try and bolster the peso by selling its foreign currency reserves, but these measures have done little to prevent the dollar’s phenomenal rise. Instead, this has meant losing reserves that had been steadily building since Macri assumed the Presidency in 2015.
“The problem for the BCRA is that it is an open secret that the agreement with the IMF prevents it from intervening by selling reserves to control the level of the exchange rate and that they can only supply the market in ‘homeopathic’ doses,” the economist Fernando Camusso, director of Rafaela Capital, told La Nación. “And the option of letting the dollar run only gives you more liquefaction and stagflation [an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity], and it is not very viable in a context in which the disarmament of Lebac was faced, because it would be to ensure that these pesos go straight to the dollar, with a very high cost in reservations. It’s a real trap.”
Ultimately, the government is attempting to calm the markets by lowering the country risk rate to attract investors. Yesterday, the country’s risk rate closed at 689 points. The government is reportedly working on all fronts to release a statement in the coming hours that will dispel doubts and restabilize the currency market. The order of the day is convincing investors that Argentina is not heading for another default.