Argentine President Alberto Fernandez warned against a sharp devaluation of the country’s currency as expectations mount that his soon-to-be-elected successor will have no other choice to address a chronic dollar shortage.
“An abrupt devaluation would be a problem for Argentina,” Fernandez said during an interview with Bloomberg TV’s Maria Tadeo in Brussels, where he was attending a summit of leaders from Latin America and Europe. He made no mention that a currency move he characterised as “very damaging” was imminent.
Investors see a peso devaluation as all but inevitable either this year or next, with it likelier to occur after a new government takes office in December. Rumours of a devaluation have loomed over Fernandez, who is not seeking reelection in October’s presidential vote, for years as he has implemented one currency control after another.
The Argentine peso has suffered amid the South American nation’s broader economic problems, with the official exchange rate sitting above 267 pesos per dollar as of Tuesday afternoon and many local economists projecting that it will weaken to 400 by the end of this year. It has lost 34% of its value against the dollar so far this year, making it the worst performing currency in emerging markets.
The web of currency controls has prevented further slides for the official exchange rate. But the more common free-floating parallel rate has fallen nearly 60% this year, sending the gap between the two surging past 100%.
Many economists regard devaluation as a likely outcome because currency controls have played a key role in draining the central bank’s foreign reserves.
Fernandez’s political rivals, meanwhile, have pounced on the economic struggles ahead of the election. The scale of the currency’s weakening combined with high government spending have left Argentina “on the edge of hyperinflation,” according to Mauricio Macri, Fernandez’s predecessor.
But Fernandez said he sees “no signs” of hyperinflation in the near future, even as the annual rate of consumer price increases has accelerated above 100%. He blamed the triple-digit inflation on a record drought that has cost the economy US$20 billion in agriculture exports, saying it had caused a shortage of dollars that weakened the peso and put additional pressure on prices.
Argentina’s primary vote will take place on Aug. 13, followed by an October general election. Fernandez’s ruling coalition faces an uphill battle amid a bleak economic landscape, with nearly 40% of the country living in poverty and expectations for another recession this year.
After Fernandez ruled out a reelection campaign in April, current Economy Minister Sergio Massa emerged as the governing coalition’s candidate. Massa is also renegotiating the country’s US$44 billion aid program with the International Monetary Fund, an effort that has dragged on for months.
Argentina’s overseas bonds jumped this week on expectations of a deal and a victory for the opposition coalition in a Sunday gubernatorial primary election. Argentina’s bonds due 2030 have climbed more than 1.3 cents to nearly 34 cents on the dollar.
Fernandez said he expected the IMF deal to be finalised by the end of the week, and that he wanted Massa to remain in his post even as the election unfolds.
“I want him to stay with me until the end of the year,” Fernandez said. “I hope he will be able to because he is an important part of our government. I aspire for him to be my successor. I want him to help me and I want to help him win.”
By Manuela Tobias and Scott Squires, Bloomberg