Argentina's `Steroids' Economy Is Fueled by Peso's Tumble Against the Real
The Argentine peso’s slide to a record low against the real is boosting exports of cars and wheat to neighboring Brazil while fanning inflation that Goldman Sachs Group Inc. says may reach 25 percent this year.
The peso sank 5.7 percent in 2010 to 2.309 per real at 9:37 a.m. New York time, the weakest level since Bloomberg began compiling data in January 2000, the worst performance among Latin American currencies against Brazil’s exchange rate.
Argentina’s central bank estimates growth in South America’s second-largest economy after Brazil will accelerate to 9.5 percent this year, the fastest pace since 1992, as the weaker peso helps boost exports. The pickup will fuel the highest inflation in the world after Venezuela, where consumer prices climbed 30 percent in August, according to Goldman Sachs.
“The economy is growing on steroids, generating a lot of inflation,” said Alberto Ramos, an economist at Goldman Sachs in New York. “This is not a sustainable cycle. They want to stimulate net exports, not through genuine productivity gains, but by giving them a competitive exchange rate.”
Argentina’s peso will fall to 4.10 per dollar by the end of the year, from 3.9513 today, according to the median forecast in a survey of 13 economists by Bloomberg. Brazil’s real will slide to 1.8 per dollar in the same period, from 1.7101 today, according to a Bloomberg survey of 19 economists.
The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries has swelled to 678 basis points, or 6.78 percentage points, from a record low of 185 in January 2007, when then-President Nestor Kirchner made personnel changes at the national statistics agency, prompting economists and government officials to say the government was underreporting price increases.
The government said last month that annual inflation rose to 11.2 percent in July. The August inflation report is due to be published today at 3 p.m. New York time.
The yield on benchmark 7 percent bonds due in 2015 fell five basis points to 10.52 percent, according to Bloomberg market average pricing. Warrants linked to growth in South America’s second-biggest economy rose today 0.06 cent to 11.11 cents, according to data compiled by Bloomberg.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps slid 36 basis points yesterday to 814, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
Exports to Brazil reached a record $9.2 billion in the first eight months of the year, according to Buenos Aires-based research company Abeceb.org.
Trade between Argentina and Brazil, South America’s biggest economies, surged 45 percent in the past year to $14.4 billion, according to the national statistics institute in Buenos Aires.
Rising revenue from commodity exports is allowing the central bank to buy dollars to weaken the peso. Reserves climbed to a record $51.1 billion on Aug. 2, according to the central bank.
Bank President Mercedes Marco del Pont said in Senate testimony on Sept. 7 that inflation is the result of supply constraints and idle factories, according to an official transcript. A central bank spokesman declined to provide additional comment.
Argentina should stop pursuing a weak peso policy, according to Francisco de Narvaez, an opposition congressman who said he may run for president in elections set for October 2011.
“Argentine businessmen always knock on the door seeking a devaluation to avoid investing and improving productive capacity and their competitiveness,” de Narvaez said in a Sept. 13 interview in Buenos Aires. “It’s not a problem of the exchange rate, it’s a problem of improving competitiveness that Argentine companies have to accept as a major challenge.”