Another Devaluation Less Likely This Year

BMI View: The stabilisation of Argentina's foreign currency reserves and the appreciation of the peso on the black market reinforce our view that another one-off currency devaluation is unlikely this year. However, inflation, the root cause of the country's external account imbalances, remains high, suggesting that there remains a fairly high risk of another devaluation at some point over the next two to three years.

We maintain our view that Argentina's January 23 currency devaluation is unlikely to be repeated this year, as the proximate causes of the devaluation have subsided. First, the country's foreign currency reserves picture has stabilised in recent months, suggesting that the external accounts are, for the time being, less vulnerable than was the case during 2013, when reserves fell by 29.3%. The sharp drawdown in reserves was a driving force behind the previous devaluation, and a steadier stock of reserves leads us to believe that the country's external account position is more sustainable over the next several months.

Second, the appreciation of the Argentine peso against the US dollar on the black market means that potential buyers of dollars are relatively less concerned about future currency weakness. The fact that the spread is narrowing between the official and black market, or 'blue dollar', rates means that the risk of a devaluation caused by panic buying of foreign currency is less likely.

Drop In Reserves Has Been Halted
Argentina - Foreign Currency Reserves, UDSmn (RHS) & % chg m-o-m (LHS)

or Register now for free to read the full article

This article is tagged to:
Related sectors of this article: Economy, Exchange Rate Policy
Geography: Argentina, Argentina

Access all of our latest analysis, data and forecasts - request a trial