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Argentina Exchange Rate January 2024

Argentina: New government devalues official peso

The peso traded at ARS 816.0 per USD on 12 January, depreciating 55.1% month on month. Meanwhile, the parallel market rate traded at ARS 1120.00 per USD on 12 January, depreciating 4.5% month on month.

On 12 December, Economy Minister Luis Caputo said the Argentine peso would be devalued substantially, from 367 to 800 pesos per dollar, starting from 13 December. On top of this, the government introduced a crawling-peg regime, with monthly depreciation set at 2%—a rate that could be insufficient given the much higher pace of inflation expected in the months ahead.

The key short-term implication of the devaluation will be higher inflation, which our panelists expect to peak at well over 300% in mid-2024. This will weigh on purchasing power and private consumption in the coming quarters.

That said, by reducing the gap between the official currency and the parallel market FX rate, the government has reduced relative price distortions and moved closer to the longer-term goal of convergence to a single exchange rate, which is crucial to improving the business environment. For years, Argentine governments have limited the peso’s depreciation in the official market by resorting to currency controls and import restrictions in a bid to preserve dwindling international reserves; this translated into myriad parallel market rates, which hampered business activity and investment in turn.

Commenting on Luis Caputo’s 12 December policy announcements, which included changes to the FX regime, as well as to government spending and trade restrictions, an IMF spokesperson said that it welcomed the announced measures, adding that “their decisive implementation will help stabilize the economy and set the basis for more sustainable and private-sector led growth”.

There is a great deal of uncertainty surrounding the outlook for the peso, as further convergence between the official and the parallel market rate cannot be ruled out. That said, further depreciation appears inevitable this year: Our panelists’ forecasts for end-2024 range from ARS 935 per USD to ARS 3,070 per USD. Much hinges on the success of President Milei’s reform agenda: If the new government’s attempts to swiftly rekindle the economy, drastically reduce the fiscal deficit and slow money issuance prove successful, demand for the peso will firm and the currency should stabilize.

Analysts at the EIU commented on the outlook:

“We expect that the government will soon revise the crawling peg to a higher monthly rate (our forecast is for a rate of 5%) to prevent the real exchange rate from becoming overvalued again. Over the rest of the forecast period, we expect the government to keep peso depreciation moving slightly faster than inflation so as to maintain the level of currency competitiveness (measuring the currency in real, trade-weighted terms) at around 2018-19 levels.”

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