Argentina's challenges 'part of life in emerging markets'

Argentina – whose government is working to stabilize the economy and roll-back protectionist measures – has been taking a bit of a buffeting lately.

Over the past week or so the central bank (BCRA) has been battling hard to prop up the peso while recent data shows inflation is still not converging to target.

But such challenges and problems are par for the course for countries like Argentina.

"It's part of life in the emerging markets. You have a certain level of vulnerability – and that won't disappear," Gabriel Torres, an Argentina sovereign analyst at Moody's, told BNamericas. "Argentina's under a bit of pressure but, for now, everything indicates that the central bank can manage things."

The peso has been hit hard this year and the central bank has recently sold about US$5bn to stem its decline. On Friday, a day after the peso hit a record low against the dollar, the central bank announced a new package of measures, including a 675 basis point emergency rate hike to help prop up the currency.

Torres said there were two main factors that could explain what was happening to the peso.

"First, what is happening to the peso is the same as what is happening to the currencies of many emerging markets – it is being pressured by the dollar and depreciating," said Torres.

"On the other side you have internal factors," he added, citing as an example a new tax on financial income earned by non-resident investors, which has made short-term peso-denominated instruments less attractive.

Last month treasury minister Nicolás Dujovne (pictured) said Argentines were not used to a floating exchange rate and that "we shouldn't get so nervous" when there are fluctuations.

In December 2015, the month he took office, President Mauricio Macri announced the lifting of forex controls, which had been in place since 2011.

Research firm Capital Economics said the latest move by the central bank may prove sufficient to "stem the tide."

"Evidence from other EM central banks that have been forced to hike rates when faced with currency crises suggests that today's move may be enough to put a floor under the peso," Capital Economics said in a report on Friday.

Fellow research firm Oxford Economics criticized the government's embrace of "excessive gradualism" as it works to reduce structural imbalances.

"The BCRA's desperate efforts to contain the depreciation of the ARS only confirm our long-held view that excessive gradualism is backfiring on the authorities, and has made Argentina one of the most fragile EMs today," it said in a report.

"We also think that the most prudent policy now would be to announce a large-scale fiscal consolidation package," it added.

On Friday, Dujovne said the government would reduce the fiscal deficit to 2.7% this year from 3.2%. This will result in savings of US$3.2bn, he said.

INFLATION

Argentina's government is aiming for year-end inflation of 15%, a goal that many observers deem unachievable. Inflation is currently running at around 25%.

The government has maintained its target and has said that inflation will start cooling over the coming months.

Torres said that the impact on inflation from the central bank's sale of foreign reserves, at least in the short term, was positive. He added that achieving inflationary goals is a multi-year process, that Argentina was on the right path, and that ups and downs are to be expected.

Ratings agency S&P, in a report on inflation in Argentina urged the government to shift focus.

"In our view, at this point Argentina would be better served if the government momentarily put disinflation efforts aside, and instead engineered a controlled real depreciation of the peso with the intention of boosting external competitiveness, attracting foreign direct investment (FDI), and reducing the fiscal deficit."

LATIN AMERICA

Latin American central banks could come under pressure to raise rates to support their currencies if US Treasury yields and the dollar keep climbing, S&P said in a report.

"More restrictive domestic monetary policy and capital outflow pressures, without an improvement in domestic political or economic conditions, would seriously threaten to derail the economic recovery that most Latin American economies are currently experiencing," said S&P's Latin America economist Elijah Oliveros-Rosen.

Brazil's central bank has stepped up its FX intervention after a sharp depreciation of the local currency.