Argentina Peso: Why is Argentina economy in trouble? What does it mean for global economy?

Argentina Peso: Why is Argentina economy in trouble? What does it mean for global economy?

30/08/18 - 19:03 - Investors are panicking over Argentinean President Mauricio Macri’s handling of the country’s economic crisis. But why is the Argentina economy in trouble and what does it mean for global economy?

The peso lost nearly one-fifth of its value today, despite the central bank increasing its benchmark interest rate to 60 per cent. 

The central bank’s monetary policy committee held an emergency meeting today, where members unanimously voted for the increase from 45 per cent. 

The aim is to attempt to curb inflation at 31 per cent and help stop the peso dropping even further. 

In a statement, the bank mentioned “the foreign exchange rate situation and the risk of greater inflation” as the reasons for the hike.

Argentina is expected to enter a recession in the third quarter after borrowing costs, government spending cuts and a drought that impacted on the agricultural sector have resulted in the peso becoming the world’s worst-performing currency this year. 

Macri was elected to lead Latin America’s third largest economy in 2015, but he was never able get the private investment he wanted for the economy and had to battle cuts to public utility subsidies raised water and gas bills, which resulted in inflation. 

However, the interest rate increase does not seem to have helped stabilise the peso, as it today it finished down 13.12 per cent at a record low of 39.25 pesos per US dollar, despite it hitting 42 pesos earlier in the day. 

Investors started to panic yesterday after Macri said he had made a deal with the International Monetary Fund (IMF) to speed up payments of a $50 billion loan programme, which was agreed in June.

But this did not calm the nerves of investors, particularly as Macri admitted there was a “lack of confidence in the markets” about Arminia ability to pay its $24.9 billion peso- and foreign currency - denominated debt payments next year. 

Paul Greer, a portfolio manager at the Fidelity Emerging Market Debt Fund, said: “It looks likely that the economy is heading for a hard landing recession over the next 12 months.” 

The IMF responded it was only considering feeding up payments due to the financial melt down, but Argentina needed to start implementing stronger fiscal and monetary policies in the meantime. 

The central bank auctioned $330 million today, which brought this week’s interventions to more than $1 billion. 

The bank has already sold more than $13.5 billion this year in a bid to help the currency and this has left it with $54.3 billion in foreign currency reserves. 

Argentina has already agreed with the IMF to cut its fiscal deficit from 3.7 percent of gross domestic product last year to 2.7 percent in 2018 and 1.3 percent in 2019.

What does it mean for the global economy? 

The Turkish Lira crisis in Turkey has put pressure on other currencies around the world. 

Since the start of the year, the lira has dropped around 40 percent against the greenback. 

Over time, inflation has led to the lira spiralling and investors losing faith in Turkey’s fiscal discipline. 

An Indian Rupee is now 0.011 to the pound. 

The Rupee is suffering due to rising oil prices and strong month-end dollar demand as well. 

This has also affected Argentinean currency, as one Peso currently stands at 0.020 to the pound. es un sitio web oficial del Gobierno Argentino