Earlier this summer, Argentine President Mauricio Macri faced severe criticism as the country’s currency plunged, economic growth collapsed, and inflation surged. It would actually be an understatement to assume all is not well for the Latin American nation.
Despite a USD 50 billion International Monetary Fund (IMF) bailout, the Argentine peso continues to collapse, inducing the next wave of inflation, and it could shortly usher in the next recession/depression.
With a run on the peso, Argentines and investors are bracing for financial volatility, which judging by the latest declines in emerging-market currencies — it might have already started. If so, Argentina rather than Turkey could impose exchange controls which are governmental limitations on the purchase and/or sale of the peso.
USD/ARS (PESO) SPOT RATE
According to Reuters, economists had pointed out that Argentina’s peso was extremely overvalued, and it seems that the government made the fatal mistake by acknowledging the problem. In April, the peso started its plunge against the dollar, due to investor concerns about the government’s ability to control inflation and the threat of interest rate hikes plus quantitative tightening via the U.S. Federal Reserve, which rapidly strengthened the dollar worldwide.
USD/ARS Spot Rate
With the peso in terminal decline, Argentina’s dollar debts became more expensive for the government, prompting it to tap a USD 50 billion lifeline with the IMF.
NATIONAL INFLATION Y/Y
While it is evident that Argentina needs to stabilize the peso before the free-falling currency forces the next round of economic pressures to its fragile economy by stoking inflation, Reuters figures that inflation is around 31 percent year over year.
FOREIGN CURRENCY RESERVES
Argentina seems to be running out of runway with a declining peso severely depleting the country’s currency reserves.
Interest rates have been raised to 45 percent and selling billions of dollars in fx reveres have not convinced investors that the government has the problem under control.
While the IMF loan gave reserves a boost back to April levels, it seems that any further selling of the peso will drain reserves quite quickly.
ECONOMIC ACTIVITY Y/Y
With inflation surging and rising interest rates choking economic activity, the financial storm in Argentina is only getting started. To make matters worse, a devestating drought has decimated the harvest of soybeans and corn, said Reuters, adding that agriculture is the backbone of the economy.
As shown below, the economy has contracted for three straight months, with the agricultural sector baring the most weight on the slump — as some economist told Reuters that a recession is on the horizon.
Economic data shows GDP dropped by 6.7 percent in June, “the worst monthly fall since the global financial crisis of 2009,” concluded Reuters.
“Meanwhile, a clear move to greater fiscal discipline to restore investor confidence seems to be an implausible option for the government. Not only would budget belt-tightening likely deepen the economic recession toward which the country now seems to be lurching, it is also that the Macri government would not seem to have the political support for such belt-tightening, especially ahead of next year’s general election. Since having called in the IMF for assistance, President Macri has seen his support at the polls drop from 50 percent to 35 percent.
In December 2015, at the start of his presidency, the Macri government made the crucial mistake of lifting all exchange controls before stabilizing Argentina’s economy and before aggressively embracing deep economic reform. The government now seems likely to have to pay dearly for that mistake. With the currency plummeting and with other options having run out, President Macri may very well soon be forced to reintroduce exchange controls to put a floor to the currency’s damaging free fall,” said Desmond Lachman, a Resident Fellow at American Enterprise Institute.
Visualize the emerging market currency crisis in one chart — it is a global problem.
And lastly, emerging markets/G7 FX volatility ratio just hits the highest level since 2008 and the global financial crisis. Could there be a much larger storm brewing just not in Argentina?