Argentina boldly lifts currency controls, floats peso in bid to boost economy

Argentina said on Wednesday (Dec 16) it was lifting its currency controls and would allow the peso to float when markets open.
Argentina said on Wednesday (Dec 16) it was lifting its currency controls and would allow the peso to float when markets open. PHOTO: AFP

BUENOS AIRES (REUTERS) - Argentina said on Wednesday (Dec 16) it was lifting its currency controls and would allow the peso to float when markets open, setting the stage for a sharp devaluation, following vows by new President Mauricio Macri for reforms to spur economic growth.

Mr Macri, a free-markets advocate who took office last week, wants to boost exports and regain investor trust in Latin America's third largest economy, damaged by heavy state intervention and a lack of trustworthy official data.

Argentina's previous leader, Peronist Cristina Fernandez, used central bank reserves to prop up the peso while restricting access to the artificially inflated rate, spawning a currency black market.

"He who wants to import will be able to do so, and he who wants to buy dollars will be able to buy them," Finance Minister Alfonso Prat-Gay said.

Farmers in Argentina, a grains-exporting powerhouse, have been waiting for the peso to weaken before selling stockpiles of soybeans. Manufacturers have argued for controls to be lifted so they can import crucial parts for production.

Local and foreign investors, meanwhile, might be inspired to bring money back to the country if Macri's reforms succeed in reducing imbalances in the economy in the long-run.

Asked what he expected the exchange rate to be when markets open, Mr Prat-Gay said there was "no magic number." However, the most realistic level at the moment was the blue-chip swap rate, used to buy Argentine assets traded abroad. That rate is currently around 14.2 pesos per US dollar, compared with the official exchange rate of 9.8275, implying a devaluation of around 30 per cent.

"Let's see what happens tomorrow. The policy will be what economists call a 'dirty float'," Mr Prat-Gay said. "There will be fluctuations in the exchange rate but there will also be a central bank with the necessary tools to buy if the currency weakens too much or sell if it strengthens too much."

Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management in New York, said it was positive to see the new government immediately tackling the currency issue. "The exchange rate was very important because it will eliminate all the distortions that were in the market," he said.

Mr Mariscal said there was a chance the peso could weaken more than 30 per cent at the start, "but there is also a significant chance that it comes back rather quickly." "There is a lot of Argentine money outside waiting to come back once the new team builds some credibility," he said.

A Reuters poll of analysts released earlier this month predicted Mr Macri's policies would spell stronger growth in the medium term after causing short-term pain. The devaluation is seen fueling inflation that private economists already estimate around 25 per cent and thereby hurting private consumption.

The median forecast was for 3.5 per cent growth in 2017 after a 0.5 per cent contraction in 2016.

In order to ensure there are enough dollars to go around, Argentina was securing various sources of financing and expected inflows of US$15 billion to US$25 billion over the coming month, Mr Prat-Gay told reporters.

A few hours after his news conference, the central bank announced it had converted Chinese yuan from its currency swap with China for US$3.1 billion of dollars to bolster its foreign reserves.

Mr Prat-Gay said he also expected the bank to reach a deal with foreign banks within 10 days for a credit line worth more than US$5 billion. Last week, a banking source told Reuters that Argentina was in talks over a loan with HSBC, JPMorgan Chase & Co, Goldman Sachs, Deutsche Bank and Citigroup

Argentina has been restricted from accessing international capital markets for years by a long-running legal battle with creditors over unpaid debt that Mr Macri has promised to settle later in tough negotiations.

The South American country has also sealed a deal with grains exporters to liquidate US$400 million of produce per day over the next few weeks, Mr Prat-Gay said.

Alejo Costa, chief strategist at local investment bank Puente, said the new government's policy move was bold and had good chances of succeeding. "He sent the correct message, that they have the strength to defend the currency at certain levels, and conveyed the confidence needed to anchor expectations," Costa said.