Argentina's currency gets boost from tight monetary policy

File photo. Photograph:( Agencia EFE )

Agencia EFE Buenos Aires, Argentina Feb 08, 2019, 01.14 PM (IST)

The ultra-tight monetary policy that Argentine authorities adopted amid last year's currency crisis has yielded results and given a big boost to the peso, although economists see potential trouble on the horizon ahead of the October 2019 general election.

After months of turmoil in which the peso lost half of its value and fear spread that further depreciation could lead to a debt default, the peso has strengthened relative to the dollar to the point that it is no longer trading within the band established under a $57 billion bailout package with the International Monetary Fund.

In a bid to weaken the peso and keep it within the trading range, Argentina's Central Bank (BCRA) started buying dollars last month on the foreign exchange market.

Economist Victor Beker told EFE that sky-high interest rates of more than 50 per cent have increased investors' appetite for Argentine bonds, which now offer a "fabulous return."

"I don't think there's any economic activity, except for drug trafficking, that can compete with that yield," said Beker, director of the Center for New Economy Studies at Argentina's Universidad de Belgrano.

He added that the philosophy now in Argentina is "take advantage while it lasts."

The peso closed at 37.4283 to the dollar on Wednesday, a level below the non-intervention trading band established in negotiations with the IMF. The moving band ranged on Wednesday between 38.021 and 49.203.

Last August, a new round of capital flight forced Argentine President Mauricio Macri to ask the IMF for an early release of funds from the standby financing deal to calm markets.

As part of the effort to shore up the peso and rein in price increases, the BCRA rolled out an IMF-backed program last September to freeze money supply growth, keep interest rates at a minimum of 60 percent (that floor on its benchmark interest rate has since been removed) and put in place a "floating band" for the peso.

Although those measures served to strengthen Argentina's currency, Beker cautioned that no economy in the world can function with interest rates at such a sky-high level because they strangle the real economy.

He also noted that rates are at astronomical levels at a time when the country is in recession.

While economists believe that the currency market will remain stable in the first half of the year thanks to an influx of dollars into the financial market and hard-currency earnings from exports of products such as soy and wheat, they say the situation is tenuous because of presidential and legislative elections scheduled for October.

Beker said the supply of dollars should not be in doubt in the first part of the year but that "then comes a second half that will be complicated because the bulk of (Argentina's) exports are carried out in the first half, and then in the second we're going to be immersed in the electoral process."

Economists consulted by EFE are forecasting that the run-up to the elections, with the foreseeable calls by candidates to renegotiate the country's debt, will increase uncertainty and prompt holders of Argentine pesos to purchase dollar-denominated foreign assets.

Story highlights

In a bid to weaken the peso and keep it within the trading range, Argentina's Central Bank (BCRA) started buying dollars last month on the foreign exchange market.