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)|