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Home / Features / Can Argentina’s peso show any signs of improvements during the next few months?

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Can Argentina’s peso show any signs of improvements during the next few months?

When it comes to the worst performing currencies from developing countries, Argentina’s peso is attracting a lot of eyeballs these days. The economic condition is such that even hiking the benchmark interest rate to the highest levels is not proving helpful. Critics are putting the blame solely on President Mauricio Macri’s way of handling the crisis.

The nation’s Treasury Minister Nicolas Dujovne recently assured the citizens that the government is going to take a set of measures to make sure that the country does not need more money from the debt markets. To help the currency stay afloat, the central bank has already sold $13.5 billion from its reserves and plans to continue with its interventions even further. The minister is confident that the peso will become strong during the next few months and the country remains competitive enough. Moody’s expect Argentina's inflation percentage to reach 32% this year.

Argentina is often referred to as the third-largest economy in Latin America. It faced a drought this year that has severely hurt the agricultural sector. Plus, the government spending cuts and excessive borrowing cost will probably cause further trouble in the form of a recession.

Politically, the economy’s condition is also expected to hurt President Macri who is set to face re-election during 2019.

The International Monetary Fund’s help comes with a lot of dos and don’ts, especially, in the government spending. The IMF has recently warned the Argentina government to reduce its spending for decreasing fiscal deficit. This has not gone down well with labor unions.

The Economist Intelligence Unit’s director for the Caribbean and Latin America region, Fiona Mackie shared his opinion on the central bank’s decision to hike the interest rate even further from 45 percent 60 percent. He said the country might face political risk, recession, and rapid adjustment in rates can prove to be painful. The peso has already earned the reputation as the world’s worst-performing money this year.

However, the move did not help much in easing the currency’s woes and still closed at 39.25 against the US dollar. It also managed to touch its record low of 40 in September. No matter if a trader uses martingale strategy or some other technique; he won’t be able to make money on this currency.

During the first week of September, investors became more nervous when President Mauricio Macri announced that he has managed to convince the IMF to disburse their $50 billion at the earliest. He intended to ease the tension with this news, but, it backfired and spread even more panic amongst investors.

Financial analysts did not appreciate the president’s confession regarding lack of confidence in the market about Argentina’s ability to repay its debt which has crossed the $24.9 billion mark.

The IMF agreed that it’s speeding up its efforts to help Argentina get out of the financial meltdown. However, it also warned that the country’s government needs to come up with strong monetary and fiscal policies.

Even the corporate sector is facing the heat, except for export-focused companies of course. A weaker currency means more money for them.

The country’s $640 billion worth economy did calm down a bit in June when the deal with IMF was announced. However, the happiness did not last much. Reducing inflation and adjusting the budget deficit won’t prove to be an easy task.

The previous center-left government faced several corruption cases. So, President Mauricio Macri had won the 2015 elections with promises and assurances about solving the economic crisis. He has failed to bring the sustainable growth and private investment that he had promised to attract with a new set of reforms.

But, new plans for job cuts, soaring inflation and an increase in poverty levels after 2015 have given a unique opportunity to the opposition parties.

Macri’s voters are raising their voice against the government these days, claiming that it is becoming harder for citizens to make ends meet.

To make matters worse, Argentina’s largest labor union, the General Confederation of Labour, has planned a series of strikes from the month of September as a sign of protest against president’s belt-tightening measures involving job cuts. The condition is such that besides all the professionals, even teachers from various schools and colleges in the country protested on the streets as the rocketing inflation is reducing the value of their salaries. The inflation percentage rising faster than wages is undoubtedly a reason to worry for the country’s citizens.

Argentina’s fiscal deficit was 3.7 percent in 2017. It has promised the IMF to bring it down to 2.7 percent this year and to 1.3 percent by the next year.

Central bank pulling all possible measures

Between April and September this year, the central bank has already increased its benchmark interest rates five times. Now, multiple plans regarding how the government can cut its spending are expected to be tabled during the coming days.

Besides the South American country, several other emerging markets like India, Turkey, Russia, etc. are also facing currency devaluation. Perhaps, investors are pulling out their funds from emerging markets that they do not feel confident about. As far as Argentina is concerned, a resurgent greenback and hike in energy prices in most parts of the country are adding fuel to the fire.

Market participants are not sure about how the Buenos Aires plans to repay the massive government debt that it has accumulated during the last few years.

Some experts also believe that the U.S. Federal Reserve’s tighter monetary policy has managed to boost the dollar. But hurt the emerging markets like Brazil, South Africa, Turkey, and Argentina in the process.

Trouble may not spell into other economies

Trade analysts believe that Argentina and Turkey are worst hit. Their cheap loans and international debts have created trouble for both the countries. Currencies of these two nations happen to be some of the most sold during the recent days. So, the problems will probably not spill over to other countries.

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