Argentina scrapped some of its currency controls a day after devaluing the peso as policy makers sought to stem a financial crisis and restore investor confidence by reversing measures that drove foreign reserves to a seven-year low.
Bonds fell and the cost to insure the South American nation’s debt against default soared to a three-month high as traders bet the move could backfire and lead to further dollar outflows. The peso dropped 1.5 percent to 8.0014 per dollar at 3:34 p.m. in Buenos Aires, extending its plunge this week to 15 percent, the worst selloff since a devaluation that followed the country’s record sovereign default in 2001.
The currency market overhaul is the latest, and boldest, measure tried by President Cristina Fernandez de Kirchner as she seeks to win back investors, regain access to international debt markets, shore up a faltering economy and curb inflation that soared to 28 percent last year. The increase to 23.8 percent in the annual cost to protect the nation’s debt against default makes it the most expensive in the world.
The easing of controls is an attempt to stem panic among Argentines, said Siobhan Morden, head of Latin America fixed income strategy at Jefferies Group LLC. “They are hoping it creates less panicky demand for dollars.”
She said the country needs to implement additional measures such as curbing money supply growth to make the foreign-exchange policy changes effective.
“Markets will give them a day or two,” Morden said. “But if there’s no follow-up, the prices trade lower again.”
The peso’s plunge forms part of an emerging-market currency rout this week that was triggered in part by a deepening of the political and financial crises in Turkey and Ukraine. The lira sank 4.1 percent in the week while Russia’s ruble dropped 2.9 percent and South Africa’s rand weakened beyond 11 per dollar for the first time since 2008.
In Brazil, the real slumped 2.6 percent to a five-month low on concern that the peso devaluation will erode demand for the country’s goods. Argentina was Brazil’s third-biggest export market in 2013. Neighboring Chile and Uruguay could also be hurt, Schroder Investment Management said in a note to clients today.
Cabinet Chief Jorge Capitanich, who was appointed in November to help reshape government policies, unveiled the currency market changes in Buenos Aires today.
Argentines will be able to buy dollars in proportion to their income, and a 35 percent redeemable tax on buying foreign currency will be cut to 20 percent, he said. Currently, Argentines are often denied requests to buy dollars from the central bank, fueling illegal street trading in which the peso has changed hands at as little as half the value. Policy makers are trying to close the gap between the two exchange rates.
“Our administered currency policy has reached an acceptable level of convergence for our economic objectives,” Capitanich said at the presidential palace.
After a surge in economic growth fueled by rising commodity export prices following the default, the government has implemented a series of unsustainable measures and is being forced to reverse them, Nobel laureate economist Joseph Stiglitz said.
“Reality will clearly force some changes: you have to live within your means, if your currency is going down, it means you’re going to be paying more for your imports,” Stiglitz, a Columbia University professor, said in an interview today on Bloomberg Television. “They will have to change their policies and the question is when and how.”
Fernandez’s policies of printing money to fund social spending on subsidies while freezing utility rates amid accelerating inflation are unraveling as the budget deficit widens and funding from the treasury and pension fund grows. Investment in South America’s second-largest economy has tumbled amid import controls and delays in approving company dividend repatriations.
The International Monetary Fund, which censured Argentina last year for misreporting inflation, predicts economic growth will slow to 2.8 percent this year, about half the 5.1 percent average across developing nations. The 28 percent annual inflation rate reported by opposition lawmakers is more than double the government’s figure of 11 percent.
Since Capitanich took office along with new Economy Minister Axel Kicillof, Fernandez has changed tack. The government pledged to work with the IMF to improve data, began talks to settle $6.5 billion of overdue debt with Paris Club creditor nations and unveiled plans to compensate Spain’s Repsol SA for the seizure of its local oil unit in 2012.
The cost to insure Argentine debt against default for five years soared the most since August, climbing 1.94 percentage points to 23.76 percentage points, according to data compiled by Bloomberg.
The extra yield investors demand to buy Argentine bonds instead of U.S. Treasuries widened 16 basis points, or 0.16 percentage point, to 1,012 basis points, according to data compiled by JPMorgan Chase & Co. Stocks slumped, driving the benchmark Merval index down more than 4 percent in the past two days.
The peso’s slide to a record low has made it the world’s worst performer this year. It’s dropped more than 35 percent over the past 12 months.
After winning re-election in 2011, Fernandez restricted access to foreign currency amid capital flight that surged to a record $21 billion that year. Since then, the government has implemented more than 30 measures to cut access, including taxes on credit card purchases and limits on online spending, that have failed to curb dollar demand.
Reserves have tumbled at a rate of $1.1 billion a month over the past year to $29.3 billion, the lowest since November 2006. They’ve declined 44 percent from a record $52.6 billion in 2011.
Argentina’s trade surplus narrowed 27 percent to $9 billion in 2013 as fuel imports rose while prices on soy exports dropped and farmers withheld supplies waiting for the peso to weaken further before exporting.
The easing of currency controls is a “measure in the right direction,” Andre Esteves, chief executive officer of Sao Paulo-based investment bank Grupo BTG Pactual, said in an interview on Bloomberg Television. “Who’s pushing this devaluation isn’t the financial market, it isn’t speculators, it isn’t derivatives. It’s basically the society of Argentina.”