Far-right libertarian Javier Milei’s victory in Sunday’s presidential primaries took the market by surprise and the government decided to devalue the peso by 22% the following day. According to various consulting firms, this much-demanded “correction” in the exchange rate will not bring stability to the economy, but quite the opposite.
Economy Minister Sergio Massa said in a press conference on Friday that the devaluation was a condition imposed by the International Monetary Fund (IMF) for Argentina to receive a US$7.5 billion disbursement next week amid a serious international reserve scarcity crisis. Other senior government officials told the Herald that Milei’s victory in the primaries also influenced the decision, as the candidate proposes to shut down the Central Bank and “dollarize” the economy.
A report by the Anker consulting firm said that the devaluation was not “accompanied by a program to reverse expectations.” Two other consulting firms, Ecolatina and Equilibra, agreed that the measure was not part of a comprehensive plan.
“Given the lack of confidence and credibility in the context of an acute shortage of reserves, the devaluation is just one more element that adds uncertainty to the macroeconomic scenario, once again de-anchoring inflationary expectations,” said the report by Ecolatina.
Contrary to other jumps in the exchange rate, the government did not announce Monday’s devaluation in a press conference. The same day, the Central Bank published a communiqué increasing the interest rate by 21 percentage points to encourage local investors to maintain their pesos, instead of fleeing to the dollar.
However, Massa did not appear publicly until a television interview on Wednesday, saying he would not resign amid rumors swirling about his exit. In a bid to stop the increased exchange rate from affecting prices, the government announced a series of measures during the week, including new price agreements reached with supermarket chains, pharmaceutical companies, and oil companies.
Anker said that, because it was implemented without any additional measures, the devaluation did not result “in a gain in competitiveness for exports, nor a reduction in the demand for imports, nor a narrowing of the exchange rate gap.”
Ecolatina agreed, pointing out that the adjustment of the alternative exchange rates to the new nominal levels of the official rate “was practically immediate.” In the first three days of the week, the blue dollar (the informal exchange rate) rose by 30% and closed at AR$780 on Wednesday. The gap with the official exchange rate was 123%, the highest since former Economy Minister Martín Guzmán resigned in July 2022, Ecolatina calculated.
“The government’s intervention in the financial markets allowed the rise in the blue-chip swap rate and the MEP to be slightly limited, which, as the days went by, helped to narrow the divergence between the alternative exchange rates,” said Ecolatina.
However, these interventions in the secondary bond market cost the government US dollars which it doesn’t have. While it does not provide exact figures, the Central Bank reported that it lost US$600 million in a category marked “Others” from July 24 to August 14. Anker considers that the loss could be explained by intervening in the MEP market by rebuying debt.
“The sharp acceleration of inflation will not only deepen the deterioration of socio-economic indicators but will also deepen the recession,” Equilibra wrote, adding that the GDP could fall by an average of 3% this year.
According to Anker’s report, inflation may accelerate more than usual with a calculated 25% cumulative inflation for August and September. The consulting firm highlighted a high immediate pass-through to prices of many mass consumer products as well as durable goods (via price increases or temporary withdrawal of sales).
Since access to dollars at the official rate was increasingly restricted from July, the increase in parallel exchange rates could cause an inflationary impact even bigger than the devaluation percentage — heightening fears of a further devaluation.
Another consulting firm, 1816, wrote in a post-electoral report that the macroeconomic foundation was weak to begin with, outlining that the political uncertainty — as the results did not make it not clear which candidates could compete in an eventual ballotage — and the dollarization debate taking center stage has only aggravated the situation.
“At this point, given the acceleration in the economy’s nominal prices that we forecast until December 2023, it’s increasingly likely that Argentina is going toward some kind of dollarization of its economy […] independent of who ends up being the next president.”