On Day One in New Argentina, No Sign of Much-Awaited Devaluation

Argentina’s Economy Under New Leadership
  • Reserves at nine-year low seen as impediment to free float
  • Naming of new central bank president hasn't been made official

While President Mauricio Macri pledged to let the peso float as soon as he took office, he’s finding that it might require more time to unwind a web of currency controls.

In Macri’s first full day at the country’s helm, Argentina’s official peso rate fell 0.2 percent to 9.7692 per dollar at 3 p.m. in Buenos Aires, in line with the pace of depreciation set by the previous government’s crawling peg policy. Traders betting in the offshore futures market see the government allowing its official exchange rate to plunge 35 percent in the next three months to 15.13, close to where the peso currently trades in the black market.

In order to let the currency float in an orderly way, the country needs more international reserves, according to Barclays Plc strategist Sebastian Vargas. With gross reserves at a nine-year low of $24.9 billion, and a fraction of that amount in cash, the government is seeking as much as $10 billion from Wall Street banks in exchange for a one-year note backed by foreign currency debt held at the central bank, according to two people involved in the discussions. At the same time, Macri is counting on farmers to sell hoarded grains estimated to be worth $11 billion by the tax agency once he cuts export tariffs and weakens the exchange rate.

“It’s more painful to make the changes with a lower reserves level because you don’t have room to smooth the process,” Vargas said from New York. “With reserves, you can intervene in the exchange market and give the market the certainty that you have the ability to do so. This decreases the market’s expectations for depreciation.”

Finance Minister Alfonso Prat-Gay, a former JPMorgan Chase & Co. banker moved into the ministry today while Federico Sturzenegger, Macri’s choice to run the central bank, hasn’t been named yet in the official gazette, a prerequisite to officially taking the reins.

“We’re not desperate about the controls. When we lift them it will be because we’re ready to do it,” Prat-Gay told reporters in Buenos Aires. “It will be as soon as possible.”

Argentina plans to seek an expansion of a China currency swap once the government settles in and agricultural export tariffs will be cut next week, he said.

Sturzenegger spoke with Jorge Brito, the head of the local bank association, Thursday to say that the country’s currency market will continue as is until there is a “definitive decision,” according to a report by Cronista.

Ending currency and trade restrictions implemented by former President Cristina Fernandez de Kirchner was central to Macri’s campaign pledges in order to attract investment, fight inflation and regain access to international capital markets. The move carries risks of an overshooting of the exchange rate which could spark a surge in consumer prices, hitting the purchasing power of Argentines and prompting a backlash.

“It seems the government is pondering the macroeconomic risks and the governability risks they face,” Vargas said. “The question isn’t on what they need to do, but rather on what the sequencing should be. They’re going from whiteboard economics to the economics of reality, where it’s much more complicated.”

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