The shocking inflation figure of 7.7% in March and the political disputes in President Alberto Fernandez’s government have generated uneasiness in the market this week. The informal dollar has risen 10% since last Friday, reaching $440 — a sign of the high uncertainty created by the country’s delicate economic situation. 

Argentina is suffering the consequences of a historic drought that negatively affected its agricultural production. According to official sources, the lack of rainfall caused a reduction of US$ 20 billion in export revenues, especially soybean exports. This translates into a reduced capacity of the Central Bank to accumulate international reserves, a fundamental requirement to sustain economic activity. 

In order to encourage agricultural producers to liquidate their produce, Economy Minister Sergio Massa implemented the Agro dollar III, which established a higher exchange rate for soybean exports and other agricultural products. 

The inflow of dollars for agricultural exports slowed down this week. On Monday, according to official sources, producers liquidated US$ 145 million, on Tuesday US$ 36 million, and on Wednesday there was no entry of dollars from agricultural producers. 

The main dollar inflow the Central Bank has at the moment comes from the agricultural sector. Therefore, if producers do not sell their produce, the Central Bank cannot buy those dollars to increase its reserves. That is what happened this week. As agricultural producers did not sell their produce, the Central Bank recorded a negative balance of US$ 125 million between Monday and Wednesday. This negative result was especially due to the fact that on Wednesday the Central Bank sold US$ 198 million. 

Sources from the Economy Ministry told the Buenos Aires Herald that this slowdown in the agricultural liquidations was due to a proposal that Antonio Aracre, former chief advisor to the Presidency, had made to Fernández on Monday. Massa’s entourage says that Aracre, former CEO of Syngenta, suggested to the president that he should devalue the currency by 60% and implement an exchange rate split. 

The Herald had access to part of the document prepared by the former presidential advisor, which includes the recommendation of a 30% devaluation “to reduce the exchange rate gap,” although it also states that it is not a determining point of an eventual stabilization plan. The central point of the proposal was a series of measures to contain inflation, which has already reached 105% in the last 12 months. 

The brecha is the exchange “gap” between the official dollar exchange rate and the financial dollars. Since acquiring dollars in the official market is difficult due to the numerous restrictions, the investors use financial instruments that are traded in pesos and dollars as a way to freely access the hard currency. 

The blue-chip swap rate, also known as contado con liqui or CCL, is obtained by investors buying shares or bonds in pesos and selling them in dollars on the international market. The “CCL dollar” is the implicit exchange rate in that operation. The “MEP dollar” is the same as CCL but in the local market.

The brecha is important because many economic agents use the value of financial dollars (CCL and MEP)  as parameters to set their costs and prices.

The rumor of Massa possibly getting replaced as economy minister was spread on Monday night. Journalist Carlos Pagni claimed on his TV program that Aracre was “warming up” to take over that role. On Tuesday, in the midst of a strong rise of the dollar, the presidential advisor resigned. 

“I have handed in my immediate and irrevocable resignation to President Alberto Fernández as Chief Advisor,” he posted on social media.

To dispel the rumors of the economy minister’s impending resignation, Fernández and Massa held a meeting this morning at the Olivos presidential residence and their spokespersons sent a photo of the two to the press.

In addition to the dollar, other Argentine assets registered strong falls this week. Sovereign bond parities plunged by 12% on Wednesday and stocks on the Buenos Aires Stock Exchange saw a drop of up to 6.2%.

This week, a proposal by libertarian candidate Javier Milei to dollarize the Argentine economy also gained ground in public opinion. The increase in his popularity ahead of the presidential elections and the possibility of this actually happening also generates nervousness, which in Argentina usually translates into an increase in the demand for dollars.