Argentina’s Black Market Peso Falls to Weakest in 10 Months

Argentina’s black market peso fell to its lowest in 10 months on expectations that a new government in December will have to devalue the official rate which is strictly controlled by the central bank.

The street value of the peso weakened 0.98 percent to 15.3 pesos per dollar, according to Ambito. That compares with an official exchange rate of 9.25.

While the majority of emerging market countries from China to Brazil are weakening their exchange rates to remain competitive, President Cristina Fernandez de Kirchner’s administration is refusing to accelerate the pace of depreciation of the peso ahead of Oct. 25 elections where the front-runner is from her party. The next government, which takes over Dec. 10, will have to address the overvalued exchange rate, according to Fausto Spotorno, chief economist at Orlando Ferreres & Asociados.

“There’s a significant expectation of devaluation,” Spotorno said by phone from Buenos Aires. “The next government will have to adjust the exchange rate and that will probably have a negative impact on inflation.”

Central Bank President Alejandro Vanoli, who took over in October to stem a drop in reserves and arrest the sinking of the peso in the black market from a record 15.95, insists the currency is not overvalued.

While Vanoli managed to increase gross reserves by tapping $8 billion of yuan from a China swap agreement and by adding foreign currency from grain exports, the harvest season is now ending and there will be fewer dollars, said Maximiliano Castillo, director of Buenos Aires-based economic consultancy ACM.

The government, which is locked out of international capital markets due to a legal battle with hedge funds seeking payment on defaulted bonds, faces a $6.3 billion debt payment on Oct. 3. That’s currently about 19 percent of reserves.

Since devaluing the official peso rate 20 percent in January 2014, the government has let the currency weaken just 13 percent compared with a tumble of 29 percent for Brazil, its largest trading partner.

As recently as April, the peso in the black market traded at 12.38 pesos per dollar. Due to restrictions imposed in 2011, Argentines turn to the street market to obtain foreign currency when the government doesn’t give them authorization to buy at the official rate.

“The surprise for me was that the government was able to maintain exchange rate stability until June,” Castillo said. “I don’t believe the conditions are there for the gap to be reduced. On the contrary, the conditions are there for the gap to widen.”