Investors in Argentina perplexed by policy U-turns
Investors and analysts alike are losing faith that Argentina’s policymakers have a clear plan to reduce the wild volatility that has roiled the country’s financial assets in recent weeks, as the central bank introduces a fourth change in six weeks to its currency intervention rules.
On Monday, the central bank overturned a previous promise to let the peso float freely within a designated band. Now, in a bid to stabilise the currency and bring down inflation, which sits at nearly 55 per cent, the central bank said it had full discretion to tap its roughly $72bn of foreign reserves to intervene in the currency market whenever it sees fit.
The peso rallied 3.5 per cent on the news to 44.35 a dollar, while yields on short-term government debt fell well below the distressed levels breached last week, indicating a rise in prices. But according to Guillermo Tolosa at Oxford Economics, the repeated policy U-turns are likely to have long-term consequences.
“By changing the policy stance so often, it sends a signal that they are not self-confident in their own plan,” he said. “It creates more uncertainty about the policy framework, which erodes credibility going forward and could put even more pressure on asset prices and the exchange rate.”
For Ed Glossop at Capital Economics, the most recent shift in the central bank’s intervention strategy not only looked “panicked” but policymakers had also failed to explain the decision. “The communication strategy has been completely botched,” he said. “The central bank will likely pay the price for that in the coming quarters.”
The central bank’s most recent pivot comes after the peso plummeted to a record low against the dollar amid a frenzied sell-off across all Argentine assets last week. Investors dashed for the exit as polling showed brightening political prospects for former leftist president Cristina Fernández de Kirchner and declining support for pro-reformist incumbent Mauricio Macri in the upcoming October elections.
Given these recent ructions and the limited tools at the government’s disposal, Paul McNamara at GAM argued that at this point, anything that could help Argentina turn around the peso and break the “vicious cycle” of runaway inflation and capital flight was worth trying.
“It’s a total crapshoot and it probably won’t work, but they have tried pulling every other lever and failed,” he said.
In addition to intervening in the currency, Argentine officials have also pushed through massive fiscal tightening and the tightest monetary policy that Mr McNamara said he had seen in a long time.
Shamaila Khan at Alliance Bernstein had more confidence in the central bank’s plan. “The ability to contain peso volatility ahead of the election is important to boosting Macri’s chances of winning the presidency,” she said.
It is likely for this reason that the IMF, which is bankrolling Argentina as part of a record $56bn bailout package, publicly endorsed the country actively intervening in its currency — a tactic the fund has historically frowned upon other countries using.
According to Edwin Gutierrez, the head of emerging market debt at Aberdeen Standard Investments, the IMF had no choice but to approve it. “The IMF is usually not excited seeing its money spent on intervention,” he said. But, “they would rather have this administration in office next year than deal with the unknown that is Cristina”.
For this reason, Mr Gutierrez said he expected the IMF to continue backing the central bank’s “kitchen sinking” strategy of testing out different policies no matter how disjointed they were from previous ones. “If this new one doesn’t work, I’m not sure what else they have in their arsenal,” he added.