A sign in the window of Quintex, a hardware store in the Wilde neighborhood of Buenos Aires, shows the effect of the peso’s biggest devaluation since 2002.
“Out of respect for our clients, this store will remain closed until our providers set their prices,” it reads.
Other shopkeepers chose not to wait to see the results of last week’s 15 percent depreciation, raising prices as much as 30 percent on appliances, electronics, wine and other goods that aren’t regulated by the government, while supermarkets seemed to abide by food-price accords reached earlier this month. President Cristina Fernandez de Kirchner left for Cuba over the weekend, days before the start of a regional summit, leaving top aides to try to contain price increases as investors raised bets on further declines in the peso.
“The first reaction has been a paralyzation of almost all the markets for goods and services tied to the official exchange rate,” Domingo Cavallo, who as economy minister in 1991 linked the peso to the dollar at one-to-one, said in a telephone interview from Cordoba, Argentina. “No one wants to sell merchandise at a price if they don’t know what the rate will be tomorrow.”
Twelve-month non-deliverable peso forwards plunged 10 percent last week before gaining 0.3 percent today to 11.9966 per dollar as of 4:38 p.m. in New York, signaling the currency will weaken 33 percent over the next year. The peso was unchanged in the official market at 8.0031.
The extra yield, or spread, investors demand to hold the nation’s dollar-denominated bonds instead of Treasuries has jumped 0.89 percentage point since the beginning of last week to 10.09 percentage points.
Cabinet Chief Jorge Capitanich said the government is monitoring prices to prevent abuse. Household appliances, cars, electronics and other goods with a percentage of imported parts will be subject to a permanent monitoring, he said.
In his daily press briefing today, Capitanich said Argentine individuals who earn a monthly wage of 7,200 pesos ($900) or more will be allowed to buy dollars again starting today to build dollar savings. There will be a limit on these purchases of $2,000 per month, and they will be taxed at 20 percent unless kept in deposit for at least a year, according to a resolution on today’s official gazette.
Argentines had already been coping with annual inflation estimated at about 28 percent, the highest in Latin America after Venezuela, and currency controls that restricted access to dollars at the official exchange rate.
Consumer prices had risen 3 percent in January before the devaluation, and inflation will quicken to more than 30 percent this year, according to Lorenzo Sigaut, the head economist at the Ecolatina research company in Buenos Aires.
“This surprised us all and creates serious uncertainty since you don’t know where the exchange rate is going,” Sigaut said in a telephone interview. “This is a government that continues to deny inflationary problems but now has to win the battle of expectations.”
The government is seeking to restore investor confidence by paring back some of its control of the economy, reducing support for the peso and easing some currency controls after international reserves used to pay bondholders fell to a seven-year low.
Argentina’s dollar-denominated global bonds due 2033 rose 0.53 cent to 65.50 cents on the dollar today, dropping yields 0.12 percentage point to 13.83 percent. Credit-default swaps, contracts used to insure the nation’s debt against non-payment, rose 1.23 percentage point to 27.39 percentage points at 3 p.m. in New York, according to CMA prices
In addition to reversing some limits on how much dollars Argentines can buy, the government is raising interest rates. The central bank raised its yield guidance for a weekly bond auction by six percentage points to about 26 percent on Jan. 24 to create more demand for pesos.
The peso’s plunge forms part of an emerging-market currency rout last week that was triggered in part by a deepening of the political and financial crises in Turkey and Ukraine. The lira sank 4.4 percent in the week, 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 last week, the real slumped 2.3 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.
Capitanich and Economy Minister Axel Kicillof have both said the peso has now reached an “acceptable level” at about 8 per dollar, a signal the central bank may continue to spend reserves to keep the rate in check. Argentines pay as much as 12.15 pesos per dollar on the black market after the rate weakened 3.7 percent today.
Retailers “always find a good reason to raise prices; a change in the exchange rate, it’s humid outside, any excuse,” Kicillof said on public TV yesterday. “They lie and steal.”
Electronic goods store owner Roberto Campos, 46, raised prices 20 percent last week following the peso’s decline. He was skeptical that the government will allow people to buy dollars today, saying it will probably create bureaucratic obstacles in a bid to restrict access.
Sales at Campos’s store rose about 10 percent in the wake of the devaluation as people bought before prices rose, he said. Business will probably slow in the medium-term as the government continues to let the peso slide, he said.
“This is just the beginning,” he said while staring at a computer that was updating prices on his goods to reflect the new exchange rate. “Last year there was lots of uncertainty, now the uncertainty is a reality.”
At a store owned by Chilean retailer SACI Falabella in downtown Buenos Aires, the price of a Whirlpool 80X1 model refrigerator on Jan. 24 had risen 30 percent to 27,499 pesos ($3,437) from 21,199 pesos two days earlier.
Enrique Briceno, Falabella’s spokesman, didn’t reply to calls seeking comment.
“The company hasn’t increased its prices during January,” Julian Ballarino, a Whirlpool spokesman in Buenos Aires, said in a telephone interview.
“The fridge is assembled in Argentina, but all the components are imported,” Andre Viera, a salesman at the outlet on Florida Street, said in an interview. “The lady who came in on Wednesday and said she would be back to buy it on Saturday must be suicidal.”