Argentina’s peso tumbles after government lifts dollar limits

23 Dec 2015 | Author: | No comments yet »

Argentina lifts controls on the peso.

Argentina’s peso plunged more than 26.5 per cent on Thursday, after the country’s new government floated the currency as part of a slew of free-market reforms aimed at revitalizing the stagnant economy. Grain exports from Argentina, the world’s third-largest shipper of corn and soybeans, will add $2.4 billion to the country’s foreign reserves by year-end after the new administration allowed the biggest one-day peso devaluation in the last 14 years today. Argentina’s peso tumbled as much as 30 percent on Thursday as newly inaugurated President Mauricio Macri fulfilled his campaign promise of letting the currency float freely. Introduced by Cristina Fernández de Kirchner’s government in November 2011, currency controls made it almost impossible for ordinary Argentines to purchase dollars, preferred by savers to the inflation-prone peso.

The big winners were farmers in the sprawling Pampas grains belt who will start getting paid in stronger U.S. export dollars, while average consumers risk seeing their purchasing power fall. Finance Minister Alfonso Prat-Gay announced the lifting of four years of currency controls Wednesday saying that the government had reached a deal with exporters who pledged to export $400 million a day for a total of $6 billion over three weeks. “Grain exporters couldn’t sell all the dollars they pledged as there were no buyers in the market,” Prat Gay told reporters at the presidential house. “They sold $20 million and the market traded $45 million on an abnormal day without a futures market.” As of today, Argentina has shipped $18 billion of grains and oilseed abroad this year, the lowest for the period since 2009, according to the exporters’ group data. The central bank issued a statement saying it did not intervene in the foreign exchange market to support the peso on Thursday, the first day of its new “dirty float” policy under which the bank may buy pesos if the currency weakens too much.

Argentine farmers were storing an estimated $11.4 billion of soybeans, corn and wheat to protest export taxes and the difficulty in obtaining export permits. His predecessor, two-term president Cristina Fernandez, believed in heavy state control of the economy. “This is part and parcel of the much-needed reality check that Argentina is getting with its new president,” said Charlie Robertson, global chief economist at Renaissance Capital. “Large devaluations tend to be pretty disruptive and negative for gross domestic product in the short-term, but much more helpful in the long-term,” Mr. The measure marks the beginning of Mr Macri’s programme to normalise the economy after a dozen years of populism under Ms Fernández and her late husband, Néstor Kirchner, who preceded her as president. The new president has inherited inflation running at around 25% a year, a fiscal deficit forecast to reach 7% of GDP by the end of the year and depleted foreign-exchange reserves. “The country was in a situation where it couldn’t continue without a resolution,” says Maximiliano Castillo, director of ACM, an economic consultancy.

Farmers had been hoarding grain—in sacks 60 metres (200 feet) long—in response to steep tariffs imposed by Ms Fernández’s government and in anticipation of the peso’s devaluation. On December 14th Mr Macri scrapped tariffs on agricultural products such as wheat, beef and corn and reduced from 35% to 30% the tariff on soya, Argentina’s biggest export.

In November American Airlines—which flies 27 times a week to Buenos Aires—stopped selling tickets in pesos because it was not allowed to repatriate the earnings. Since Mr Macri’s election victory on November 22nd, his finance team has been working behind the scenes to replenish dollar reserves ahead of the devaluation. If “the devaluation started to unravel more quickly than they were comfortable with then there is substantial goodwill in the market”, says Neil Shearing, chief emerging-markets economist of Capital Economics, a research firm. “Credit lines could be extended. To show his commitment to such containment, and to reduce upward pressure on interest rates, Mr Macri will soon have to begin cutting the enormous budget deficit.

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