New policies announced to strengthen stabilisation programme
The economy minister,Nicolás Dujovne, announced that the Treasury would sell US$9.6bn of its forthcoming disbursement of about US$10.8bn from the IMF in order to repay peso-denominated debt, as well as to cover part of the government's current expenditures. Mr Dujovne stated that the US dollar sales would take place through daily currency auctions of US$60m per day beginning in mid-April. Although the repayment of debt obligations is a positive, the announcement did raise concerns that the Treasury was looking to intervene excessively in currency markets as it had done previously; between mid-April and mid-June 2018 the Treasury auctioned upto US$100m daily, but failed to stem peso depreciation of close to 20% during that period. However, the government wasquick to clarify that these US dollar sales are not intended to interfere with the exchange-rate policy of theBanco Central de la República Argentina (BCRA, the central bank). If US dollar sales cause the peso to appreciate below the lower bound of the BCRA's "non-intervention zone", the central bank will purchase the dollars to maintain controlled peso weakening.
In a sign of policy co-ordination, the BCRA announced that it would maintain its rules-based framework for currency intervention in the secondquarter as well. However, the non-intervention zone will now be adjusted upward daily at a monthly rate of 1.75%, down from 2% previously. This is ostensibly to limit the inflow of pesos into the economy as a result of dollar purchases. With inflation showing strong inertia, the BCRA has also doubled down on its aggressive targeting of monetary aggregates. The BCRA extended its target for 0% growth in the money supply until December (it had initially been set until June). The BCRA also eliminated the provisions for a seasonal adjustment to the money supply target in June (when demand for pesos rises due to payments of workers' mid-year bonuses). The BCRA will also seek to maintain over-compliance with the monetary targets until December (when a seasonal adjustment will be allowed).
Impact on the forecast
The policy announcements confirm our forecast for sustained—but moderate—peso depreciation. However, insofar as currency weakening feeds into higher inflation expectations, this will complicate efforts of ensuring price stability despite the strict money supply targets.