Argentina: Pressure on the local currency eases, but reserves remain at risk
December 3, 2014
The Central Bank’s strategy of using the exchange rate as a means to contain inflation and anchor short-term devaluation expectations has intensified since the new Central Bank governor, Alejandro Vanoli, was appointed in early October. In fact, the official peso depreciated just 1.15% during the October–November period, which was notably below the 2.70% depreciation accumulated in August–September. Despite the recent reduction in the Bank’s gradual devaluation policy, the currency has lost 38.6% of its value in the last twelve months, which is well above the 27.6% depreciation recorded in the same period last year. On 3 December, the official peso traded at 8.53 ARS per USD.
The new strategy of stabilizing the official exchange rate has reduced devaluation expectations and, as a result, has brought some relief to the black-market peso. The so-called “blue dollar” improved from 15.70 ARS per USD at end of September (before the Governor Vanoli was appointed) to 12.83 ARS per USD at the beginning of December. On 3 December, the “blue dollar” traded at 12.98 ARS per USD.
Although pressure on the local currency has eased somewhat over the past two months, the desperate need for foreign currency prompted the government to implement some heterodox policies in an effort to tackle this issue. In addition to tightening restrictions on imports as an attempt to safeguard reserves, the government has received two installments of a currency swap arrangement with China in the past two months: the first, worth USD 814 million, was received on 30 October, and the second, worth USD500 million, came two weeks later on 17 November. The currency swap is part of a USD 11 billion loan that Argentina signed with China in July, shortly before the country entered in technical default for the second time in twelve years.
The problem is that the government has failed to address underlying fiscal and external imbalances, which is reflected in dwindling reserves. Moreover, Argentina’s external position is particularly difficult, since the country has to rely on its reserves to pay for imports and debt obligations –the country has no access to international financial markets since its mega-default in 2001. The recent fall in global oil prices might help reduce the country’s large energy bill somewhat. However, falling export revenues due to weaker demand from Brazil and China, and low global soy prices—Argentina’s key export commodity—will put renewed pressure on the trade balance going forward. In addition, Argentina faces unusually large external debt payments in 2015. Capital and interest payments on public debt in foreign currency amount to USD 12.6bn next year, which is well above the USD 7.2bn due in 2014.
Regardless of how the holdouts saga will be resolved—Argentina is expected to resume negotiations with the holdouts in January 2015, when the RUFO clause expires—the country’s situation regarding its foreign exchange reserves is still worrisome. According to the Central Bank, international reserves totaled USD 28.2 billion at the end of November, the same amount as at the end of 2005 and far below the record-high of USD 52.1 billion reached in 2010.
Author: Cecilia Simkievich, Economist