Argentina: Post Primaries Devaluation

Figure 1: Official and Black Market Exchange Rate (ARS/USD)

Source: BCAR and Refinitiv

Following the unexpected triumph of far-right candidate Javier Milei in the Argentine Primaries, a comprehensive set of measures has been unveiled by the Argentine Government. Notably, a 21% devaluation of the official exchange rate has been enacted. This strategic move, as articulated by Presidential candidate and Minister of Economy Sergio Massa, has been coordinated with the IMF, constituting one of the prerequisites for Argentina to secure a USD 7.5 billion disbursement slated for the latter half of the year. The primary objective of this devaluation is to account for inflation and invigorate exports, thereby heightening the competitiveness of Argentine goods in the global market. Notably, the timing of this currency adjustment, occurring promptly after the primaries, is driven by political considerations, given the historically unpopular nature of devaluation measures. Massa announced that the Official Exchange Rate will be kept stable until the election on Oct. 22, but we expect the black market one (BLUE) to continue to devaluate.

Concurrently, the Central Bank of Argentina has declared a significant 210-basis-point increase in the policy rate (LELIQS), propelling it to 118%. In effective terms—measured in yield over a 12-month period—the interest rate reaches 209%, representing a positive real-term rate. This aligns with a stipulation from the IMF to ensure the continued disbursement of funds. This interest rate elevation endeavors to counterbalance the potential transmission of devaluation-induced effects into inflation. However, we remain skeptical that this measure alone will suffice, as there's an anticipated surge in inflation during August and September. Additionally, the expectation of a post-election devaluation might restrain export aspirations, potentially compromising the BCAR's intention to accumulate reserves.

Figure 2: Policy Rate and CPI (%)

Source: BCRA and INDEC

Presently, the reserves have reached their lowest point in a decade, impacted by agricultural droughts that have curtailed the output of certain exports. This hindrance has undercut the BCRA's capacity to amass reserves, leading to a substantial decline in their levels. To meet the USD 3.5 billion amortization obligation tied to the IMF deal, the BCAR has resorted to secured loans from other multilateral organizations such as CAF and IDB, along with swap lines facilitated by the People's Bank of China.

Figure 3: BCAR International Reserves (USD Millions)

Source: BCAR

Reports suggest that Sergio Massa is formulating a series of initiatives aimed at fostering exports and achieving a zero fiscal deficit by 2024. Nevertheless, prevailing sentiment within the market indicates skepticism regarding Massa's political prospects, given his perceived limited likelihood of triumphing in the October elections. Consequently, the credibility of the measures he has recently championed within the government remains dubious. While our perspective maintains that the election outcome is still uncertain, the dominant contenders appear to be Patricia Bullrich and Javier Milei.