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Unchecked ripple effects of devaluation: Argentina may go for further weakening its peso

Unchecked ripple effects of devaluation: Argentina may go for further weakening its peso

Business

A 211pc inflation, widening gap between official and parallel exchange rates are the reasons

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LAHORE/BUENOS AIRES (Web Desk) – A weaker currency without huge exports is a trap for a developing or underdeveloped country, making it a hostage to the US dollar. We in Pakistan is witnessing the consequences of rupee devaluation since 2018 which has turned into a snowball effect in the shape of record-high inflation and interest rates.

Thankfully, Pakistan has been able to halt and somewhat reverse the rupee slide. However, the damage had already been caused and we are continuing with experiencing the economic crisis which means unprecedented cost of living crisis for millions, pushing many of them into poverty.

But the situation in Argentina worsening as Reuters says the 211 per cent inflation rate and the return to a widening gap between official and parallel exchange rates is stoking expectations of another peso devaluation, just over a month after its dollar value was cut in half.

The South American country's peso has been sliding since the turn of the year in the popular black market and other parallel markets, which for years have diverged sharply from the official rate, which is propped up by strict capital controls.

Dollars cost over 1,200 pesos in parallel markets, versus around 820 at the official exchange rate. That's a gap of nearly 50pc, which has doubled in recent weeks after narrowing sharply in December when the government devalued the peso more than 50pc.

That widening is stirring market expectations that the government of libertarian Javier Milei may devalue again soon, especially with monthly inflation over 25pc in December, well above the 2pc monthly 'crawling peg' weakening the peso.

"If this rate of depreciation of the peso is sustained and there is no positive news on prices, expectations regarding a devaluation will increase," said Pablo Besmedrisnik, director of the consulting firm Invenómica.

He added it would make more sense to devalue before the key harvest period in March-April of cash crops soy and corn, otherwise expectations of a devaluation then would encourage producers to postpone exports, hurting state coffers.

'WAKE UP TO ANOTHER DEVALUATION'

Inflation at a three-decade high, demand for dollars by importers and political uncertainties this year have weighed on the peso, which had gained ground in parallel markets in the wake of the devaluation by Milei after he took office.

"I would not be surprised if one of these days we wake up to another significant devaluation by the central bank," said a veteran local foreign exchange trader who asked not to be named, adding the 2% monthly crawling peg was "unsustainable".

A devaluation, he said, would encourage more exports and help cut the fiscal deficit.

A central bank spokesperson declined to comment

Argentina has myriad parallel exchange rates, popular because access to the official market is strictly limited. The "CCL" rate has weakened 20pc this year, the black market "blue" rate has lost 17pc, while the official rate is down just 1.3pc.

Argentina, which has a $44 billion programme with the International Monetary Fund (IMF), has built up some $5 billion in foreign currency reserves this year, part of economic targets with the lender, helped by the weaker official peso.

Agustín Etchebarne, director at the Freedom and Progress Foundation, said that the government would likely devalue again in February-March ahead of the harvest. Argentina is the No. 3 corn exporter and one of the top processed soy suppliers.

"In my opinion, they have to get out of the exchange rate trap as soon as possible and have a true single and free exchange market, or well, dollarize," he said, referring to a longer-term plan pitched by Milei to adopt the dollar.

"It's clear that the 2pc monthly devaluation with much higher inflation is not sustainable."