Argentina: Argentinian peso plummets following surprise primary election outcome
The peso traded at ARS 350.03 per USD on 7 September, depreciating 19.1% month on month. Meanwhile, the parallel market rate traded at ARS 720.00 per USD on 7 September, depreciating 17.2% month on month. This was due to the Central Bank devaluing the peso by around 18% in the wake of the 13 August primary elections. Outsider libertarian candidate Javier Milei came in first in the elections, gathering around 30% of the vote, followed by the opposition center-right bloc Juntos por el Cambio (JxC) with 28% of the vote and the ruling populist Peronist coalition with 27%. The peso has now lost over half its value so far in 2023, with the monetary financing of the fiscal deficit, plunging agricultural exports due to a devastating drought, and a chronic lack of confidence piling further downward pressure on the currency this year.
The Central Bank’s devaluation was a response to a sell-off of Argentinian assets following Milei’s surprising breakthrough at the polls. Milei’s strong electoral performance made the prospect of dollarization—his key policy proposal to tackle inflation—more real, boosting the attractiveness of holding dollars at the expense of peso-denominated assets. Evaporating international reserves and heightened uncertainty about the outcome of the 22 October presidential election and a possible default likely put further downward pressure on the peso, and made the pre-primary-election rate of ARS 288 per USD impossible to sustain.
Looking ahead, the Central Bank aims to maintain the current exchange rate of around ARS 350 per USD until the elections. So far, it has achieved this, though our panelists expect a sharp depreciation by year-end given the Bank’s limited resources to sustain the fixed exchange rate for long. The currency is then seen losing over half its value in 2024. This will feed through to triple-digit inflation this year and next.
Argentina’s economic situation is further complicated by a decision taken by a U.S. court on 8 September to deem the country liable to pay damages of about USD 16 billion to minority shareholders of previously-nationalized oil and gas company YPF. Although the government will appeal the decision, the court ruling only adds to concerns over the country’s fiscal solvency and could put downward pressure on the currency ahead.
Commenting on the FX outlook, analysts at the EIU said:
“Once in power, we expect that the next government will move quickly to lift many currency controls, causing significant peso devaluation in December-January. Depreciation pressures will ease after this maxi-devaluation as the gap with the black-market rate narrows and the real exchange rate weakens to a more competitive level. There is a growing risk of dollarisation or the establishment of a bi-monetary system.”