Argentina: Largest depreciation in 12 years forces government to relax capital controls
February 14, 2014
The Argentinean peso (ARS) recorded its largest drop in twelve years as the Central Bank scaled back intervention in order to preserve dwindling international reserves. On 23 January, the peso closed at 7.90 ARS per USD, which was 13.4% weaker than the close of the previous day and represented the peso's steepest fall since the height of the Argentinean financial crisis in 2002. The Central Bank gave in and allowed the currency to drop in order to stop the drain of international reserves, which closed January at USD 27.7 billion, the lowest level in over seven years. Foreign exchange reserves are of vital importance to Argentina; the country relies on the reserves to pay for imports and to honor its debt obligations, as it has had no access to financial markets since it defaulted in 2001.
Following the devaluation, the government relaxed part of the capital controls that it had implemented gradually since Christina Fernandez de Kirchner's reelection in October 2011. The Kirchner administration had previously argued that these controls were essential. The national tax agency (AFIP) authorized purchases of up to a maximum of USD 2,000 for citizens earning a monthly salary of more than ARS 7,200. People who are qualified to make purchases will be able to save up to 20.0% of their monthly salary in USD. A 20.0% surcharge will be levied on USD purchases; USD deposits of more than a year will be excluded from the surcharge.
Meanwhile, the Central Bank adopted measures to draw investors to the peso and to stop the drain on reserves. The Bank raised interest rates on its fixed-rate notes and adopted a regulation by which private banks will not be able to hold more than 30.0% of their wealth in foreign assets. These measures were partially effective in stopping the slide of the peso and stabilizing its value. On 14 February, the peso rose to 7.81 ARS per USD after having reached the lowest level on record on 31 January, when it traded at 8.02 ARS per USD.
Confidence in the peso, however, remains low, as Argentineans are still worried about prospects of another devaluation in the coming months. On 14 February, the black-market peso traded at 11.93 ARS per USD. While this reading was above the record low of 13.05 ARS per USD reached on 23 January, it was a substantial 8.9% weaker than the level recorded on the same day of the previous month and a hefty 55.6% weaker on an annual basis.
Against a backdrop of soaring inflation and faltering economic growth, analysts believe that the measures adopted by the government may not be enough to restore confidence in the value of the peso, prevent further devaluations in the coming months nor stem the threat of a full-blown financial crisis. LatinFocus Consensus Forecast panelists expect the official peso to end 2014 at 9.63 ARS per USD, which would represent a 51.8% drop compared to the 6.34 ARS per USD recorded at the end of 2013. For 2015, panelists expect the currency to weaken further and end the year at 12.23 ARS per USD.
Author: Armando Ciccarelli, Head of Data Solutions