Argentina’s Central Bank Lifts Policy Rate to 60%
Argentina’s peso tumbled again on Thursday as President Mauricio Macri grapples with a crisis of confidence sparked by growing social unrest and skepticism about his ability to contain runaway inflation, cut spending and meet financing needs.
The Central Bank of Argentina sharply raised its key interest rate to 60% from 45% at an unscheduled meeting early Thursday in an effort to shore up the plunging peso. The currency fell to new lows days after the government asked the International Monetary Fund to speed up loans under its bailout package.
Despite the rate increase, the selloff in the peso continued, falling 15% to a record low of 39.1 to the U.S. dollar. The peso has depreciated 53% so far this year, the worst-performing major currency in the world outside of Venezuela.
The turmoil intensified earlier this week, after Mr. Macri’s government on Wednesday asked the IMF to speed up disbursements on a $50 billion bailout package. In a brief televised address, Mr. Macri said access to those funds is necessary to address a “lack of confidence from markets” in Argentina’s ability to make ends meet amid global uncertainty affecting emerging markets.
“Guaranteeing financing for 2019 is going to allow us to strengthen the confidence,” he said.
But his message spooked some investors because it failed to provide details on policy measures, raising questions about whether the country would be able to meet its debt obligations in coming years. The country has defaulted twice since 2000.
“The market did not react well to President Macri’s announcement,” Goldman Sachs chief Latin America economist Alberto Ramos wrote in a note to investors, adding that it was seen as a “somewhat desperate measure.”
Many investors say Mr. Macri’s government isn’t reacting quickly enough to events and is taking too gradual an approach to shoring up its balance sheet. They say the government needs to cut spending faster or raise more revenue.
“This is an issue of raising confidence, not raising rates,” said Diego Ferro, co-chief investment officer at Greylock Capital Management.
Mr. Ferro said the government needs to lay out a coherent plant that goes beyond the IMF bailout, including passing a sustainable budget.
Earlier this year, the IMF agreed to a $50 billion bailout, the international lender’s biggest ever, in an attempt the stabilize the peso and avoid a full-blown crisis. The first $15 billion was handed over in June. The deal requires the highly indebted government to take tough austerity measures at a time when Argentina is suffering from high inflation and slowing economic activity.
How Argentina plans to fill a financing gap that is estimated to be $82 billion over the next two years remains an open question, according to Exotix Capital. The firm said it is increasingly likely that Argentina will need to issue more debt at a time when its bonds are underperforming, with yields in the double digits.
Rising interest rates and spending cuts are pushing the economy into recession, hurting tax revenue and eroding Mr. Macri’s political ability to trim back spending. Annual inflation was 31% in July, while economic activity in June contracted 6.7% from a year earlier.
Adding to the turmoil are several communications gaffes that have contributed to the crisis as Mr. Macri, a former businessman who took office in 2015, looks to unravel the free-spending policies of his leftist predecessor, Cristina Kirchner.
In December, the government raised its inflation target to 15% for 2018, from a range of 8% to 12%, in a bid to boost economic growth, drawing criticism from analysts who questioned the independence of the central bank. A few weeks later, the monetary authority lowered interest rates despite inflation being well above the target.
This month, the government said it was suspending plans to lower taxes on the soybean sector, drawing criticism from farmers who were already hit by one of the worst droughts in decades.
Meanwhile, Argentines are increasingly upset with rising inflation and higher utility prices due to reductions in costly subsidies. On Wednesday, the CGT union confederation called for a national strike on Sept. 25, while many small-business owners say they are struggling to stay open. A massive corruption scandal that emerged this month involving officials in Mrs. Kirchner’s administration is expected to further hurt the economy by slowing public works projects.
Speeding up disbursement of the IMF money would likely force Argentina to take more drastic steps, including “stronger monetary and fiscal policies,” IMF Managing Director Christine Lagarde said Wednesday. She said she instructed IMF staff to work with Argentina to strengthen the arrangement and “re-examine the phasing of the financial program.”
Mr. Ramos of Goldman Sachs said that frontloading disbursements under the IMF agreement might not be enough to stabilize markets. The government might have to consider a “fiscal adjustment shock” instead of gradually reducing its deficits.
“However, given how impaired market sentiment is, particularly among locals, at this stage, there are no costless options,” he added.
Capital Economics’ Latin America economist Edward Glossop said the higher interest rates may be insufficient.
“The move has provided some support to the peso, but our sense is that maintaining investor confidence for a sustained period will require more input from the government—particularly details on how it plans to meet the IMF’s fiscal targets,” he said.
Julie Wernau & Anthony Harrup