The Four Weapons Argentina Has to Avoid a New Storm in 2019
Argentina experienced a real storm in 2018 after the economy fell into recession, the currency dropped the most in the world and the International Monetary Fund came to the rescue with a record credit line.
In this year of presidential elections, the government and the Central Bank are already sharpening their tools to defend the relative calm in the exchange rate seen since October.
"The election is the main source of risk for Argentina this year," Pilar Tavella, economist at Barclays, said in a note to clients. The government’s challenge is to try to head off any turbulence that could compromise the chances of Mauricio Macri of being re-elected.
In Argentina, in presidential election years, savers and companies tend to buy dollars to protect themselves from political risk which often lead to devaluation pressures on the peso.
At the end of June, senator and former president Cristina Fernández de Kirchner is expected to announce if she will run as a presidential candidate. "If polls show former president Kirchner as competitive, weakening pressure on the exchange rate can be expected," according to Tavella.
1. High real interest rate
Since October, the central bank has maintained strict control over the amount of money in circulation, causing an unprecedented rise in rates in pesos. The idea is to displace the dollar among preferences of investors, by encouraging the positioning in assets in local currency. Argentina’s local currency instruments pay 30 percentage points above the expected inflation, according to Banco Itaú.
"The real interest rate in pesos is at historically high levels and allows the currency market to stabilize," the Brazilian bank’s economist in Argentina, Juan Carlos Barboza, says. The nominal interest rate has already dropped almost 16 percentage points from highs on Oct. 8, to 57.61 percent, but maintains its value in real terms amid the decline in inflation.
2. "Ultracompetitive" Peso
The Argentine peso is almost 50 percent weaker over the past year which has allowed Argentina to reverse outflows of foreign currency that was hurting the economy.
The improvement is seen in the demand for dollars from savers and in the trade balance. The difference between purchases and sales of dollars for savings of Argentines fell in November to $107 million, from $2.4 billion a year ago. During this period, the trade balance of goods and services showed a $979 million surplus against a $1.5 billion deficit.
3. Ammunition in futures
The Central Bank completely unwound its open position in dollar futures in the market at the end of 2018, from the almost $3.6 billion that it had on Sept. 28, as part of the agreement signed with the IMF. Now, the president of the institution, Guido Sandleris, could sell dollar contracts and build a position again to dissuade runs against the local currency.
"It’s a good resource because it’s a way to intervene without using reserves," Daniel Chodos, strategist at Credit Suisse in Argentina, says. "But this can have a monetary effect and, if the amounts are large, could impact inflation."
The central bank has a limit for building up a futures position again of $1.9 billion by June.
It is part of the strategy of Gustavo Canonero, first vice president of the BCRA, "to have firepower," says Alejo Costa, chief strategist at BTG Pactual in Argentina. "It is the best that they can do.”
4. Help from Treasury
Finance Secretary Santiago Bausili said in an interview with Bloomberg News last week that the Treasury will have a surplus of dollars this year that will be exchanged into pesos, which will provide "one more element" for currency stability. It is difficult to estimate the size of the surplus "because it will depend on the composition of debt between dollars and pesos and energy payments, which are the main uses of state dollars," Bausili added.
The Treasury will be a key player in 2019 in the market, which will help generate the necessary dollars to supply the demand of savers and companies that may arise in the months leading up to the October elections.