The Argentine peso has depreciated to the extent that one US dollar is now over twice the price it was one year ago (see left chart below). In a deep recession since early 2018, the country’s economy shrank by 2.5 per cent in 2018, with expectations for 2019 now standing at -1 per cent at best.
Despite a slight improvement in March 2019, our proprietary growth indicator has consistently been negative, leading the longer-term average into negative territory (see right chart).
In a last attempt to resolve the situation ahead of October elections, the government has announced a new set of measures aiming to improve purchasing power:
These measures follow the Central Bank’s move to restrict money expansion and to actively intervene within the currency fluctuation range introduced last year. Interest rates currently over 65 percent should remain high at least until the summer.
Even if we think the measures are going in the right direction, anything is possible.
The fact that the majority of Argentine households’ savings are already in US dollar mitigates the risks of further domestic pressure on the currency.
The problem is that despite having good intentions, the Central Bank and the Government have so far reacted in panic and long-term investors have lost confidence.
Pressure on the Macri government has been mounting, especially since the beginning of the year. The Argentines have seen their purchasing power squeezed by inflation and austerity measures. In addition, the presidential election later in the year does not leave much time for the economic situation to improve.
We will find out in June whether Macri and his rival, left-leaning and former president Christina Kirchner, will be candidates.
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