Argentina’s net currency reserves are at or near zero, according to analysts and investors, forcing the central bank into a tough choice: double down on controls that have failed to stem the currency’s decline or allow the peso to devalue further.
Downward pressure on the peso has been steady all year and intensified of late as the government continues to print its way out of a budget deficit, while inflation rising to near 40% and a lack of confidence in economic and monetary policies further weigh on the currency.
“If the population does not trust the price of the dollar where it is, if it considers that it is going to rise and is scared by the fall in reserves, there will be no choice but to devalue,” said Gabriel Torres, the country’s analyst at credit ratings agency Moody’s (NYSE:MCO).
Graphic: Argentina’s diverging peso – https://graphics.reuters.com/ARGENTINA-CURRENCY/RESERVES/nmovaddlkpa/chart.png
Argentina is on track for a 12% economic contraction this year partly due to measures taken to combat the COVID-19 pandemic and output is still some 30% below pre-pandemic levels. The official, controlled peso exchange rate has fallen 25% this year, closing Thursday at just over 80 per dollar. The unofficial rate is near 160.
“Argentina is now at a worse starting point and a more difficult path to accumulate sufficient liquidity to repay future debt liabilities,” said in a note Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities in New York.
“The stock of assets is now negative – net liquid FX reserves – against more than $150 billion in future USD debt payments.”
Gross reserves have fallen to some $39 billion from near $43 billion a year ago and a $77 billion recent peak in April 2019, while net reserves – subtracting central bank liabilities not in pesos – are much lower depending on the source.
“It is impossible for a government with the limited resources that Argentina has to fight against the macroeconomic fundamentals,” said Moody’s’ Torres, who sees tighter currency controls “because the reserves continue to fall, and depending on the measure that one uses of net reserves, they are approaching zero or they are not far from that.”
Graphic: Argentina’s dollar drain – https://graphics.reuters.com/ARGENTINA-CURRENCY/RESERVES/jznvnnnekvl/chart.png
Finance Minister Martin Guzman earlier this month said Argentina, in the midst of repackaging its $44 billion debt with the International Monetary Fund, will seek a type of agreement with the IMF that will require commitment to stringent economic reforms.
The reforms could include softening capital controls and letting the peso float at least more freely, which could slow the rush to dollarize.
“It would take an overhaul of the monetary policy setup, probably under the guise of a new IMF agreement, to prevent a more disorderly adjustment of the currency in the medium term,” said Capital Economics’ emerging markets economist Nikhil Sanghani in a note.