Argentina Opens its Economy After Currency Devaluation

Following the promise of President Mauricio Macri to re-open the economy to international financial markets after taking power, Argentina exited currency restrictions, devalued its currency, and freed imports and exports.

Some weeks ago, the Argentina’s Minister of Finance, Alfonso Prat-Gay, announced the end of the restrictions that have been in place for four years regarding currency exchange, imports, and exports.

The announcement was made four working days after the new president, Mauricio Macri, took power, and is aimed to show the public and the international investment community which direction the country is taking.

The exchange rate between the Argentine peso and the American dollar will be determined by the market with some intervention of the Central Bank, depending on the degree of demand from the public and the supply of dollars provided by exporters. In other words, the exchange rate will be controlled by the intervention of the monetary authority with a dirty float system.

At the same conference, Prat-Gay communicated to the press that anyone that wants to import goods — with some exceptions — will be allowed to do so and that most export taxes will be annulled, except in the case of soy products which will only see a 5% decrease from their current level, taking the current tax from 35% to 30% in that particular case. Imports and exports were highly controlled by the Kirchner administration, creating an 87.4% decrease in the commercial trade balance last October, prior to the change of government.

In the first day of operations, the exchange rate closed at 13.95 pesos per dollar on the selling side and 13.75 on the buying side. This new rate equals to a 41.8% devaluation of the peso in one day, which will make Argentina more attractive and competitive for commercial trade and foreign investments.

The Central Bank of Argentina also decided to raise the interest rates it pays on Lebac bills, weekly auctions of both peso and dollar denominated bills, to levels of 38% annually to take liquidity out of the market and halt the demand for dollars in the first day of operations. This increase will also have an impact on commercial banks’ interest rates, which will offer new interest rates starting at 40% for annual deposits.

An important point in the new president’s strategy involves settling the debt that Argentina currently has with almost 7% of the bondholders that did not enter any of the restructured debt plans that the Argentine government offered after defaulting its debt in 2001. The case, which led to a new default and a blockage to international funding, is being negotiated in New York between both parties.

It is very important for Macri’s administration to solve this issue with counterparts who Cristina Kirchner used to call “the vulture funds”, since such an agreement would allow Argentina to gain access, once again, to less expensive financing from international entities.

What is expected among investors?

The Argentine economy will likely see some kind of improvement next year, but expectations among investors is that it will be difficult to overcome most of the issues that have been slowing the economy down. This sudden opening of the financial restrictions, which have been damaging investors’ confidence in the country, is a promising way to start since such restrictions have caused huge amounts of capital flight towards safer destinations.

One of the biggest issues that President Macri is going to experience is the acute need for financial support to make the changes that have to be made in the short-term. That was Macri’s most poignant economic policy proposal during his campaign; he wants and needs dollar-based investments rapidly reentering Argentina to create a financial cushion that will mitigate the effects of this sudden devaluation and opening of the free currency trading.

This massive flow of foreign investment flying to Argentina, as Macri envisions, will only happen if international investors believe that it is safe to enter the country and make good business. In the eyes of these investors, entering a sound deal involves being able to predict the legal environment, the economic situation, and mostly being able to exit if necessary with not much difficulty.

Also, while today’s investment premises are focused on making immediate profits where you can, sometimes investors are also seduced by the idea of buying cheap even if you have to take a loss in the near-term, as long as you believe you can grow and make a profit when leaving later.

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