My Q&A on volatility in Argentina

Argentina’s recent currency volatility and drastic responses by the Argentine central bank have raised many questions in the market. I was recently asked for my opinion on some of these questions. Here are my answers...

The rate hikes from Argentina’s central bank reached 40% to stop the dollar escalation. Do you think this measure was adequate, what other tools could the central bank activate to stop the devaluation and inflation?  

Once a run on a currency begins it is difficult to stop unless drastic measures are put in place. The rate hike was one drastic measure taken by the government but that will not be enough to stop people from switching into USD. The other measure was the announcement that they are negotiating with the World Bank for support. That may be effective since it could bolster confidence in the government’s ability to obtain foreign exchange. The long term solution, of course, is for the government to cut spending and increase income by promoting private sector activity and investments. That can be done by liberalizing the economy, cutting bureaucracy and providing incentives for people to invest.  It’s important to note that this recent crises was triggered by a new tax on bonds coming into effect. If you want investors to flee, impose a new tax on them.

Do you think the exchange rate can climb more than 23 pesos, what is your projection for the end of the year?  

Once a currency starts a run then it is difficult to stop and in very short order we have gone from 20 to 23, so another 10% decline is not out of the question. 

On April 25, the US treasury bond exceeded 3% annually for the first time since December 2013, does that put pressure on emerging devaluation? What are the other main global factors that drive this devaluation in emerging countries?  

It is true that interest rates in the US are important in determining the USD rate against other currencies. Of course the interest rate offered by other countries is an additional factor - this is why the Argentine Central Bank raised rates. Investors don’t just look at what is being offered in terms of returns but on the probably of those returns actually being realized. Investors will flee to the USD if they believe that the currency in which they are investing will depreciate against the USD faster than any interest rate rise in that currency. They estimate that based on a number of factors including the economic growth of the country and, most importantly, the foreign exchange holdings and the relation of foreign debt to foreign reserves and GDP.

How has Argentina's country risk varied, and how is it influencing the cost of financing the State and the companies?  

Argentina’s country risk has been all over the place and recent history is instructive. However, memories are short so if the government takes measures to reduce debt and introduce even cosmetic changes in policies encouraging investment, then the cost of financing the State and companies could eventually come down.  

What has been the outflow of the Argentine debt market in recent weeks?  

I don’t have the exact figures and it would not be in the interest of the Argentine government to be active in displaying them. However seeing the drastic measures taken you can be sure that the outflow has been substantial. Remember, this is a moving target. As the devaluation progresses and interest rates move up there will be investors attracted by the possibility of a reversal and therefore substantial profits, so there will be some inflows. 

Why has inflation risen around 25% per year, versus Russia or Brazil, which are at low levels? 

The short term inflation numbers are related to the amount of money supplied by the government’s printing presses and consumers’ expectations that prices are going to rise. Any hint that the government is financing its expenditures and debt with money printing will result in a rush to purchase and thus a rise in prices. 

What products have increased their value this year in Argentina?  

There are no reliable statistics regarding which specific products have increased their value this year. Just to cite one example, in March Buenos Aires city officials confirmed that taxi fares would go up by 18%. Utility costs have also gone up. Therefore you can expect all other prices of basic necessities will rise as well. But don’t cry for Argentina because many Argentinians have expected such changes and have hedged by keeping USD in order to escape the lower buying power of the Pesos which has happened to them before.

Beyond devaluation and inflation, do you think that the structural economic problem in Argentina is the fiscal deficit and high public spending? At what level do these last two variables actually arrive?  

Yes, that is the structure problem – the fiscal deficit and high public spending combined with low public income. Those two variables have already arrived and the confidence train has left the station.

Which Chilean companies with a presence in Argentina are the most impacted by devaluation and inflation? What are your prospects for these firms for the rest of the year? 

Any company serving the local consumers are impacted including super markets, utilities, etc. Their prospects for the rest of the year will depend on their ability to keep up with price changes and maintain their margins.