Argentina: Waiting on the Fringes

Proshare

Monday, June 11, 2018/09:35 AM / Proshare Research  

The market had been worried over the soft dollar. However, the long waited strong dollar did arrive and came on the heel of strong economic performance. More importantly, the arrival of the strong Dollar coupled with strong yield on the US 10 year bond rattled emerging markets. 

As countries which had relatively lean current account found their Achilles heel blow wide open; thus fatly spiraling into a currency recoil in the wake of such band wagon effect, Argentina found itself at the repulsive end of the market, as the fall out put the Peso at a new low of 25 peso per Dollar. 

In response, the Argentine Central bank responded swiftly by raising the rates 3 times in a week, in attempt to stem the capital outflow from 25% to 40%; obviously a more sporadic action by the apex bank compared to Russia in 2016.  The bank followed up its action by issuing bonds at roof rates in attempt to wrestle the Peso from the currency recoil.  
 

 Fig 1:  Argentina Market Rates as At February 

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Source: Banco Central de Republica Argentina (BCRA)

 

The combination of rates at rate levels and substantial Peso withdrawals brought back some calm to the Peso. Regardless of the calm, Argentina remains in the woods because the Argentine current account has become heavily reliant on portfolio investors; thereby it is not surprising to see the Peso jolt to interest rate differentials. 

In reality, Argentina finds itself in an ill liquidity circumstance which could spiral out of control. In response to the lingering liquidity concerns, Argentina has tinkered with the possibility of an International Monetary Fund stability stand by assistance (SBA). 

However, for a country that has a sordid history with the IMF especially in 2001, there is a break down in trust between the Fund and Argentines, thus making such policy largely unpopular among the citizenry. Argentina has however reaffirmed its position that a gradual reform approach is best suited for a country where one out of three is already in poverty. Thus reforms must take into consideration both growth and social well-being on the short to medium.
 

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