Devaluation uncertainty: market reactions, government strategies

Prices are expected to soar following the 22% depreciation of the peso

After devaluing the peso by 22% on Monday, the government is deploying a variety of strategies to mitigate its expected impact on prices while business leaders from different sectors are preparing for the price hikes.

Customs Director Guillermo Michel replaced Commerce Secretary Matías Tombolini in the government’s price negotiations with different business sectors. On Tuesday, Customs suspended meat exports for 15 days while it closes a price agreement with the meat industry. Michel met with the Consortium of Argentine Meat Exporters (ABC, by its Spanish acronym)’s president Mario Ravettino, and Agriculture Secretary Juan José Bahillo.

“We are working with the sector on a volume and price agreement to supply the domestic market and sustain exports,” Michel said after the meeting.

“Practically no goods are being delivered to grocery stores, everything is virtually suspended since yesterday,” Germán Romero, president of the Grocers’ Association in Córdoba province, told the Herald. Romero added that the goods that companies delivered came with notable price increases — dairy products jumped by 15% and noodles and rice by 12% since last week.

A consumer goods company told the Herald it is expecting a 9% increase in prices due to the devaluation, while a supermarket chain confirmed that goods stopped coming in after it was announced. Three oil companies told the Herald that they are expecting the devaluation to take a toll on gas prices. A book distributor sent an e-mail on Tuesday to its customers saying that it would “temporarily suspend” the sale of imported books “until further notice.”

Sources asked to remain anonymous due to market volatility and the sensitivity of the subject.

“With a devaluation of over 20%, everything is expected to move around that percentage, we will see in 48-72 hours how it impacts,” said Romero.

Causes of the devaluation

On Monday, when the currency markets opened, the Central Bank devalued the peso and brought the official exchange rate up to AR$350. It committed to maintaining the rate until October. 

An official source told the Herald that the sudden devaluation was the equivalent of the entire crawling peg increase scheduled until October.

The source added that the measure was tied to the result of Sunday’s primaries, where libertarian economist Javier Milei — whose main proposal is abolishing the Argentine peso — was unexpectedly the most-voted candidate.

However, the exchange rate appears in a variety of documents released by the International Monetary Fund (IMF) as one of the main topics Argentina has been discussing with the lender

The Fund said last month in a press release that the upcoming US$7.5 billion disbursements were “subject to agreed policy actions” which have not been entirely specified and published a report saying that the Argentine peso was “overappreciated” by 20%.

On Monday, after the country devalued, the Fund published a communiqué welcoming the country’s “recent policy actions” and announcing a meeting for next week to “unlock the agreed disbursements.”

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