Peso Devaluation Unlikely To Alter Regional Trade Dynamics

BMI View: We believe Argentina's recent peso devaluation is unlikely to profoundly alter the patterns of its trade with Mercosur members Brazil, Uruguay, and Paraguay. Domestic inflation in Argentina will continue to erode the competitiveness of its exports, minimising gains from a weaker spot exchange rate, and the trade relationship is already significantly distorted due to heavy government intervention.

We believe that the devaluation of the Argentine peso in late January is unlikely to fundamentally alter the country's trade relationship with Mercosur members Brazil, Uruguay, and Paraguay (for the purpose of this analysis, we exclude Venezuela, as it has only recently gained full membership into the regional trade bloc). For one, the unit has already been weakening for quite some time without notable impact on the goods trade balance. Additionally, high inflation will soon erode any gains that Argentine exporters would gain from a weaker spot rate. Finally, the trade relationship is so heavily distorted already by government intervention, that the impact from the recent currency move is likely to be muted.

While the Argentine peso's 13.7% slide against the US dollar on January 23 was significant in that it was the largest one-day move since the country's 2001-2002 devaluation and default, in many ways it represents the continuation of a multi-year depreciatory trend. The peso had already weakened considerably against many regional peers in recent years before central bank officials decided to let the unit fall. Indeed, from June 2012 until the week before the devaluation, the Argentine peso fell by 24.3%, 31.8%, and 32.9% against the Brazilian real, Uruguayan peso, and Paraguayan guaraní, respectively.

Devaluation An Acceleration Of Existing Trend
Exchange Rates, Rebased (February 2011=100)

BMI View: We believe Argentina's recent peso devaluation is unlikely to profoundly alter the patterns of its trade with Mercosur members Brazil, Uruguay, and Paraguay. Domestic inflation in Argentina will continue to erode the competitiveness of its exports, minimising gains from a weaker spot exchange rate, and the trade relationship is already significantly distorted due to heavy government intervention.

We believe that the devaluation of the Argentine peso in late January is unlikely to fundamentally alter the country's trade relationship with Mercosur members Brazil, Uruguay, and Paraguay (for the purpose of this analysis, we exclude Venezuela, as it has only recently gained full membership into the regional trade bloc). For one, the unit has already been weakening for quite some time without notable impact on the goods trade balance. Additionally, high inflation will soon erode any gains that Argentine exporters would gain from a weaker spot rate. Finally, the trade relationship is so heavily distorted already by government intervention, that the impact from the recent currency move is likely to be muted.

While the Argentine peso's 13.7% slide against the US dollar on January 23 was significant in that it was the largest one-day move since the country's 2001-2002 devaluation and default, in many ways it represents the continuation of a multi-year depreciatory trend. The peso had already weakened considerably against many regional peers in recent years before central bank officials decided to let the unit fall. Indeed, from June 2012 until the week before the devaluation, the Argentine peso fell by 24.3%, 31.8%, and 32.9% against the Brazilian real, Uruguayan peso, and Paraguayan guaraní, respectively.

Devaluation An Acceleration Of Existing Trend
Exchange Rates, Rebased (February 2011=100)

However, despite this sustained currency appreciation against the Argentine peso, we have not seen a clear effect on these three countries' trade balances with Argentina. In Brazil, the trade balance has remained slightly in surplus for the past several years. Although we acknowledge that the devaluation could see a slight reversal, especially in the first few months of data, we broadly expect that this trend of fairly stable trade dynamics between the two countries will persist.

Losses Due To FX Weakening Have Already Occurred
Brazil - Goods Trade Balance With Argentina & Total Trade Balance, % of GDP (12-month Rolling)

Similarly, in Paraguay and Uruguay, the strengthening of each country's spot rate against the Argentine peso has not led to a shift in the goods trade account in favour of Argentine exporters. Rather, we have seen Paraguayan goods trade deficit with Argentina fluctuating between 3.0-5.0% of GDP in recent years, while Uruguay's goods trade deficit with Argentina has come in substantially, from 4.0% of GDP in January 2010 to 2.1% of GDP in December 2013.

FX Weakness To Date Has Not Led To Major Shifts In Trade Balances
Paraguay (LHS) & Uruguay (RHS) Goods Trade Balances, % of GDP (12-month Rolling)

We believe that the seeming unresponsiveness of trade dynamics to persistent weakening in the Argentine peso reflects the eroding competitiveness of Argentine exports due to high inflation and heavy intervention in the economy that has distorted normal trade flows considerably. As we expect both of these trends will continue over the medium term - at least until the October 2015 presidential election, which could see the emergence of more centrist economic policy - we believe that the trade balances between Argentina and the other countries of Mercosur will not shift heavily in Argentina's favour.

While we acknowledge that the significant spot rate fluctuation we saw in late January will have some impact on trade dynamics, just as important is the massive difference between price growth in Argentina, on the one hand, and Brazil, Paraguay, and Uruguay on the other. While consumer price inflation in the latter three countries has ranged between an average of 2.7% year-on-year (y-o-y) in 2013 at the low end (Paraguay) and 8.6% y-o-y at the high end (Uruguay), we believe Argentine consumer prices rose by an average of 24.8% y-o-y, despite official statistics that put inflation much lower. While inexact, a comparison of these inflation rates shows that much of the gains that would have accrued to Argentine exporters from the weakening of their peso against other regional currencies was likely offset by rapidly rising domestic costs that severely undermine competitiveness.

Inflation Gap Mitigates Spot-Rate Gains
Consumer Price Indices, % chg y-o-y

The erosion in the country's competitiveness is evident in the deterioration of the country's services trade balance, which we estimate widened to a 1.2% of GDP deficit in 2013 and forecast will come in at a 1.5% of GDP deficit this year. Anecdotal evidence indicates that rising prices have kept away tourists, and that Argentines who have been able to do so have travelled abroad to avoid high domestic prices ( see 'Marginal External Account Improvement In 2014').

Services Hit Hard By Lost Competitiveness
Argentina - Services Trade Balance

The second factor that we believe will mute the impact of the recent devaluation on trade flows is the high degree of intervention in goods trade that already exists in the region. Indeed, Argentina used import restrictions in a fairly opaque and ad hoc manner to inflate its trade surplus in 2012, and we fully expect that the Argentine government will try to manipulate trade flows in order to stabilise its external accounts. As a result, the trade dynamics between Argentina and its neighbours should not be thought of as 'free trade', strictly speaking, meaning that there will be relatively less impact from the devaluation than might otherwise be the case.

Read the full article

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

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.