Receive free Argentina updates
we will send you myFT Daily Digest Email summary of the latest information Argentina Every morning there is news.
The shock victory of a radical right-wing candidate in the presidential primary and Argentina’s government, which is struggling to avoid economic collapse ahead of elections in October, is under increasing pressure to devalue the currency again.
The black-market dollar, the main currency of life in Argentina, has jumped to nearly double the new official exchange rate after the peso lost 18 percent after outsider candidate Javier Milei won the primary.
At the current black-market exchange rate of about 705 pesos to the dollar, the largest denomination of peso notes in circulation is worth less than $3, forcing Argentines to carry a lot of them with them. The official exchange rate is 361 pesos to the US dollar.
“(Economy Minister Sergio) Massa’s path to avoid a collapse before the elections is getting narrower, more unstable, It gets more and more devious.” “The problem gets worse and the possible solutions end up just creating more problems.”
There was an immediate shock to voters’ wallets after Milley’s victory on Sunday. Consumer prices rose by double digits overnight as the government desperately tried to restore confidence, devaluing the peso and raising interest rates to 118%.
Prices of laptops and other electronics reportedly jumped more than 20 percent suddenly, as stores quickly marked up imports to make up for the peso’s recent depreciation.
In a sign of pressure on the government, Argentina announced on Tuesday plans to suspend beef exports for two weeks to limit domestic price increases following a currency devaluation, only to walk back hours later.
The South American country’s economy was struggling ahead of the primary election, with inflation exceeding 100% a year; about 40% of the population living in poverty; and a recession looming. With the incumbent Peronist slipping to third place in the primary, Massa, who is also a Peronist presidential candidate, faces an uphill battle to keep the economy afloat ahead of presidential and congressional votes in October. stable.
“It looks like a mission impossible,” said Alberto Ramos, chief Latin America economist at Goldman Sachs. “It seems unlikely that Massa or anyone else will fix the economy anytime soon.
“The situation has deteriorated so badly that the imbalance is so great that we may have lost the ability to manage the adjustment. Things are going to get chaotic.”
Massa’s immediate challenge is getting final approval this month from the International Monetary Fund’s board for the latest $7.5 billion tranche of the $44 billion bailout package. Monday’s depreciation will help pave the way, a move the fund has been pushing for months. Few believe the IMF is ready to terminate the debt of Argentina, its biggest debtor, so fresh money could be coming.
Despite mounting pressure on the exchange rate, Massa has resisted devaluation for months. He has insisted he will not repeat the move before the election, but few believe he can deliver on that promise.
The most pressing issue, however, is inflation. Like other economists, Romano Group’s Vitelli is now forecasting monthly inflation of 12-16% in August and September. Some economists say that would bring annual growth closer to 180% in October and bring the economy closer to a hyperinflationary spiral.
“Currency depreciation and rate hikes are not going to solve the problem,” said Edwin Gutierrez, head of emerging markets sovereign debt at Abrdn in London, which owns dollar-denominated Argentine debt.
“It’s putting a bunch of plaster on it, trying to survive until the first round of elections . . . Every devaluation is accompanied by higher inflation, and the currency becomes less competitive.”
Milley advocated radical free-market solutions, such as dollarizing the Argentine economy, closing the central bank and cutting public spending. His narrow first-place finish in the primary was seen as a preview of the October election, adding additional uncertainty to an already tight market.
“A lot also depends on what the candidates say, especially Millais,” said Amilcar Corante of the National University of La Plata. His plan, the economy will avoid a collapse. But if Milley or lesser-known people around him start saying things that cause more turmoil in an already very fragile market, it will be different.”
The outcome of the October elections remains highly uncertain, with Argentine voters divided into three roughly equal camps: Millais’ voters, the mainstream centre-right opposition (whose candidate will be Patricia Burridge) and the incumbent Peron Activists.
With no candidate at the level needed to win in the first round, a November runoff appears to be a foregone conclusion. Although the Peronist vote has fallen to about half of what it was in the last presidential election in 2019, Massa insists he can still win in a country with a strong left-wing tradition.
“Masa’s political skills will be an important factor in the coming months,” said Martín Rapetti, director of Equilibra, an economic consultancy in Buenos Aires. “Although his preliminary results were poor, the three-game winning streak still gives him a chance to reach the decider.”
Svlook
