Peso Faces Third Year as Worst Latin Currency on Deficit: Argentina Credit

Argentina may post a current account deficit for the first time in a decade next year, raising concern that the peso will weaken further and become Latin America’s worst-performing currency for a third-straight year.

The deficit will probably equal 0.4 percent of gross domestic product in 2011, according to the median forecast in a survey of four economists by Bloomberg. The peso may slide 8 percent to 4.29 per dollar by the end of next year, according to the median estimate of 13 economists surveyed by Bloomberg.

Argentina may report its first current account deficit since 2001 as imports outstrip exports. The measure of trade in goods, services and investment will likely decline 73 percent in the third quarter from a year earlier to $1 billion, according to data compiled by Bloomberg. A weaker peso may erode the dollar-based returns on local currency bonds after they gained 16 percent in 2010, compared with 15.3 percent for Brazilian debt and 8.7 percent for Russian notes.

“For an investor holding peso-denominated paper any weakening that is significant would take away from your returns,” Alejandro Urbina, an emerging-market debt manager at Silva Capital Management in Chicago, said in a telephone interview. “Beyond 4.25 per dollar, I start to look at the local investment differently. But that’s my high estimate for where things would go.”

Urbina, whose holdings include Argentine peso bonds, said he doesn’t think the government will allow the peso to weaken 8 percent. Silva has about $800 million under advisory and management.

Fernandez’s Strategy

The government reported today that the trade balance narrowed in November to $900 million from $3.7 billion a year earlier.

President Cristina Fernandez de Kirchner will seek a weaker peso next year to curb rising imports, bolster exports and avert a current account deficit, said Juan Pablo Fuentes, a Latin America economist with Moody’s Analytics Inc. in West Chester, Pennsylvania.

“That will be the best way to prevent the current account balance from sliding into deficit,” he said. “That slows down imports, it promotes exports and it helps domestic manufacturing.”

The peso may tumble as much as 12 percent to 4.50 per dollar in 2011 as the government lets it slide, Fuentes said in a telephone interview.

Credit Default Swaps

The currency was little changed at 3.9746 per dollar at 3:16 p.m. New York time. It’s down 4.4 percent for 2010.

The extra yield investors demand to hold the government’s dollar bonds instead of U.S. Treasuries fell 21 basis points to 512, according to JPMorgan Chase & Co.

The cost of insuring Argentine bonds against default for five years fell 11 basis points on Dec. 17 to 637, according to 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 comply with debt agreements.

Standard & Poor’s Ratings raised the foreign currency ratings of eight Argentine companies on Dec. 17 after a review of the business environment in Argentina. Alto Palermo SA, Compania Latinoamericana de Infraestructura & Servicios SA, IRSA Inversiones y Representaciones SA, Telefonica de Argentina SA, Transportadora de Gas del Sur SA and Telecom Personal SA were raised to B. Loma Negra Ciasa was increased to B+ and Petrobras Argentina SA to BB-, the firm said in a statement.

Consumer Prices

Argentina may curb the peso’s decline next year to slow a rise in consumer prices that Goldman Sachs Group Inc. estimates is above 25 percent, said Jorge Todesca, a former deputy economy minister who now runs Buenos Aires research firm Finsoport.

“The exchange rate is the only anchor the government has against inflation,” Todesca said in a telephone interview in Buenos Aires. He expects the peso to slide in line with the 4.10 per dollar target in Fernandez’s 2011 budget.

“Lax” fiscal and monetary policy is fueling domestic consumption that, along with inflation, is boosting demand for imports, said Bertrand Delgado, an economist at Roubini Global Economics LLC in New York.

The government reported last month spending surged 52.7 percent in annual terms in October. The central bank lifted its money supply growth target in August after surpassing its original goal.

Argentine policy makers seek to build reserves while weakening the peso to shore up exporters’ profit margins, a strategy Fernandez defended in a Dec. 7 speech in Buenos Aires.

“Without government intervention,” the peso would be worth about 1.86 per dollar, she said.

Demand for imports will climb further next year as the government steps up spending and the central bank maintains an expansive monetary policy ahead of the October presidential elections, Delgado said.

“There will be some shrinkage, or an ongoing shrinkage, of the current account surplus,” Delgado said. “It will have an impact on the peso.”

To contact the reporters on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net; Ben Bain in New York at bbain2@bloomberg.net.

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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