Argentina peso ‘frozen’ by confusion over unofficial exchange rate
Argentina’s capital controls are taking their toll, with traders and investors sounding the alarm over a widening gap between the country’s official and parallel exchange rates.
President Mauricio Macri rushed through financial-market restrictions earlier this month, seeking to stave off another debt default after a stinging defeat in primary elections. Since then the market for non-deliverable forwards, or futures contracts on the peso, has effectively shut down, reflecting confusion over the currency’s true value.
Several big investors in Argentine assets, including Goldman Sachs and Pimco, warned the Emerging Markets Traders Association this week of the damaging impact of the 15 per cent gap between Argentina’s official and unofficial exchange rates in NDFs — crucial tools for overseas traders seeking to hedge peso risks.
The country’s NDF market has a turnover of between $150m and $400m a day, and has about $5bn outstanding, but trading seized up almost entirely when the EMTA flagged its concerns on Wednesday. One international investor described the market as “broken”.
“At the moment, no one will quote you Argentine peso NDFs,” said the investor, adding that demand for peso assets will fall because it is not possible to reduce the currency risk inherent in owning them. “People who think they are hedged are not hedged . . . the NDF market is absolutely frozen at the moment.”
The development fuelled concerns among investors, who are increasingly doubtful about the chances of the speedy disbursement of the next $5.4bn tranche of the IMF’s $57bn emergency bailout to Argentina. The Washington-based body came to Argentina’s rescue during a currency crisis last year, but the next meeting between the two sides was postponed on Tuesday to October 14, just two weeks before presidential elections.
Walter Stoeppelwerth, chief investment officer at Portfolio Personal Inversiones in Buenos Aires, said the EMTA’s opinion on the NDF market is “mission critical”, noting that in 2014, when Argentina last defaulted on its debt, its opinion on the pricing of assets became binding.
“Over time the [parallel exchange rate] becomes a fait accompli, as it becomes the market view of what the peso is actually worth,” said Mr Stoeppelwerth. That is what happened the last time capital controls were in place under the previous government, he observed. “The official exchange rate loses credibility, and ceases to become referential.”
According to another international investor, the EMTA could be encouraged to come up with some kind of standardised methodology to determine the rate at which various investors can transact. This could include a daily poll administered by association, the investor said — something the industry body has done in the past.
Investors now worry that the gap between Argentina’s multiple exchange rates could widen further as speculation increases and more people change pesos to dollars at the parallel exchange rate. That would put pressure on central bank reserves at a delicate moment for Argentina, as fears swirl over a return to populism in next month’s elections.
“The reason for excess demand for dollars is that people don’t have trust that the peso will be worth anything tomorrow,” said Eduardo Suárez, a director at Scotiabank in Mexico City.
“Part of the reason is that they don’t believe the country is fiscally viable and with the IMF questioning its support, people are starting to question when the whole house of cards will fall. You need to create an environment where people are comfortable holding pesos instead of dollars.”