Argentina’s president Alberto Fernández faces growing pressure to devalue the peso as the government struggles to stabilise the economy
Argentina’s president Alberto Fernández faces growing pressure to devalue the peso as the government struggles to stabilise the economy © FT montage; Getty Images

Argentina is heading towards its seventh currency devaluation in 20 years, analysts say, as pressure builds on the peso and investors lose faith in the government’s ability to stabilise the economy.

The country struck a deal to restructure $65bn of foreign debt in August, shunting debt repayments far into the future. But financial markets remain fragile. Bond prices have dropped back down to distressed levels, equity prices have collapsed and the gap between the official and black market exchange rates is widening.

Analysts and investors think that with just $1bn in liquid reserves to hand, Argentina’s central bank will be forced to tighten restrictions on imports and reset the peso at a new, much weaker value.

“They are on a collision course [towards a devaluation]. The question is how long it takes,” said Alejo Costa, a strategist at BTG Pactual, a Brazilian investment bank. “If they keep postponing a devaluation, the inflationary impact will only get larger — and more [politically] destabilising . . . but this kind of administration only devalues its currency when it is forced to.”

Local savers and businesses have little faith in the peso’s value. Under the official exchange rate set by the central bank, one dollar buys 77 pesos. But on the black market, it buys more than double that — a record gap.

Line chart of official peso rate against US dollar, showing Argentina’s currency has plumbed record lows

A devaluation poses a problem because it would push up inflation at a time when prices are already rising very fast.

Already, the official peso rate has dropped 22 per cent against the dollar so far this year, in a slide that accelerated in early October after tighter capital controls were introduced.

The government has sought to control the currency’s pace of decline, with measures including tighter capital controls and lower taxes for the agricultural powerhouse’s soya exporters. But those measures are unlikely to have much impact, say analysts. Reserves fell by $1.2bn in the second half of September after they were announced. 

“Unfortunately, the measures have not created any incentive to increase the supply of dollars, so the central bank is clearly scraping the bottom of the barrel in search of more dollars,” said Martin Redrado, a former central bank governor. A $3.1bn loan from the Bank for International Settlements could help to buy some time, he said.

Given the crisis of confidence facing the government, authorities had only two options, said Miguel Kiguel, a former finance secretary. One is simply to devalue the peso, like the last devaluation under a Peronist government in 2014 when the currency lost about a quarter of its value — although that might not be enough this time around. 

The second option is to introduce a formalised dual exchange rate system, with many operations moved to a new weaker exchange rate, but a much narrower gap between the two rates than exists today.

“The government is trapped in a very difficult situation where any alternative has costs . . . [but] it’s going to be very hard to maintain the status quo,” he said. “But more than that, they need an integral economic plan, otherwise [any success] will last the blink of an eye.”

The IMF, which has lent Argentina $44bn since the country’s last currency crisis in 2018, may help towards the implementation of an economic plan to restore calm to markets. The multilateral lender, which sent officials to Buenos Aires on a fact-finding mission last week, is unlikely to demand tough austerity measures in return for assistance at a time when poverty has risen to more than 40 per cent due to the pandemic.

Argentina’s coronavirus lockdown has been one of the longest and strictest in the world, exacerbating the economic blow. It has just been extended once again to October 25.

One former official believes the government will be forced to act by the end of November because this year’s steady depreciation in the peso of about 2 to 3 per cent a month would no longer be sustainable. “Although the government might be able to hold on for longer than many think, once the situation accelerates, it goes fast. It looks like there are practically no breaks on this dynamic already.”

Proceeds from the farming nation’s soya exports are due to start arriving by March, prompting many analysts to believe the government could “muddle through” perhaps until the middle of next year. 

But with midterm elections due in October next year, that strategy would be risky for the government. Deeper economic strain could compromise the re-election chances of the Peronist government in 2023.

“They can hold on for a very long time through tighter and tighter capital controls,” said Graham Stock, head of emerging market sovereign research at BlueBay Asset Management. “But that’s moving policy in the wrong direction . . . Politically, that’s very dangerous, as it would be a symbol of very low confidence in economic management.”

“They are caught between a rock and a hard place,” Mr Stock said, pointing to the impact of the pandemic that has aggravated a recession now in its third year. “There are no easy answers.”

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