Devaluation Signals Major Policy Shift
BMI View: Argentina's central bank has dramatically reduced its intervention in the currency market, allowing the peso to fall by 21.3% against the US dollar at one point on January 23, as one of the key downside risks to our view for Argentina played out. We expect that there is potential for negative impacts on other Argentine financial instruments, and will be revising a host of macroeconomic forecasts in the days ahead to reflect a much weaker currency for the balance of the year.
A key risk that we had identified to our view on the Argentine peso has played out, with the unit falling by 21.3% to ARS8.234/US$ at one point on January 23, as the central bank abandons - at least temporarily - its multi-year policy of allowing only a slow, incremental weakening of the currency. The move represents a major policy change and the biggest drop in the peso since the 2001-2002 currency crisis and debt default. We see scope for additional weakness in the coming days, and potentially a period of instability across Argentine financial assets. We expect that the sell-off today will send inflation considerably higher in the months ahead, and we will be revisiting a host of macroeconomic assumptions in light of this week's move in the currency markets.
Although we had said as early as September 2012 that the currency would be devalued, we softened this view in fall 2013, writing that the central bank would instead allow a more rapid depreciation of the peso to stem the drop in reserves, a course that it had begun to pursue ( see 'ARS: Faster Depreciation Likelier Than One-Off Devaluation', September 4). The rate of month-on-month weakening has accelerated from an average of 0.9% in the first three quarters of 2013 to an average of 2.1% since then, with the unit falling by 5.8% in the four weeks ending on January 17. However, it appears that this strategy failed to halt the demand for foreign currency, with the Blue Dollar (the black market peso) continuing to depreciate rapidly.
|Central Bank Allows A Free-Fall|
|Argentina - Exchange Rate, ARS/US$ (weekly)|