Argentina: government acts, dollar gives way, but remains unresolved – 04/29/2023 – Market

“People live from day to day,” says technician Javier Sosa, 32, explaining why he cannot increase the cost of air conditioning repairs every week, keeping up with market prices. “Otherwise customers wouldn’t want to pay and I would lose work,” he laments.

The Argentine’s money, which was already melting, began to devalue even more in recent weeks. March inflation reached the highest accumulated level of the last 30 years and, shortly after the news, the parallel “blue” dollar, which dictates the country’s daily life, entered an uninterrupted climb for 15 days.

It only gave in this Thursday (28th), after a series of interventions by the government of the Peronist Alberto Fernández and the Central Bank, which is not independent as in Brazil. Even so, the results were emergency, and our neighbors are still unable to save.

A definitive solution drags on until the presidential elections, in October. “The government managed to contain the panic, but there is no consistent stabilization plan that tries to solve the problems”, says economist Matías Surt, director of the consultancy Invecq.

The rise in the exchange rate curve began on the 11th, amid rumors of the departure of the Minister of Economy, Sergio Massa. The explanation was used by the government, along with the country’s historic drought, to justify part of the exchange rate race, but was seen with skepticism by the market.

On the 20th, the Central Bank tried for the first time to increase the basic interest rate from 78% to 81% per annum, to encourage Argentines to save in pesos, but to no avail. The problem grew to the point of putting pressure on President Fernández to give up the re-election, already considered unlikely due to the economic crisis.

Still, the coin did not budge. It continued its upward trajectory until it almost touched the 500 pesos mark on Tuesday (25), while the newspapers highlighted the minute-by-minute quotation and a reporter appeared doing a “ritual” on television in an ironic tone to see if a miracle would happen.

On Twitter, the president blamed the Argentine right. “First they install rumors in the morning, then they operate throughout the day and when the afternoon ends, they remove their profitability from the exchange market and damage the savings of Argentine men and women,” he wrote.

The climate of panic made Minister Sergio Massa, who still maintains his pre-candidacy for the Presidency, to take three main measures. First, it intervened in the foreign exchange market by selling, in addition to bonds, dollars from its reserves.

The idea was to throw the foreign currency into the financial market to lower its value. For this, he had to notify the IMF (International Monetary Fund), because the agency does not allow the move. Argentina borrowed US$45 billion from the fund in 2018 and is trying to negotiate the debt payment term.

The strategy, however, further depletes the government’s dollar reserves, already damaged by the drought, which reduced exports and, therefore, the inflow of foreign currency —meanwhile, the pesos fill the banks’ vaults, as the most high in circulation is 1,000, that is, just over 2 dollars.

In order to urgently minimize the problem of currency flight, Massa announced a second measure: importing from China paying in yuan, and no longer in dollars, as Brazil also partially did a month ago. The Asian country is Brazil’s largest trading partner and Argentina’s second.

The third measure was to raise the interest rate for the second time in a week, from 81% to 91% a year, to encourage people to invest in government bonds. This means an effective annual rate, that is, a yield when the money is left invested for one year, of 141% (above inflation expectations, around 120%).

This all made the dollar finally yield from Wednesday and stabilize – it is not known until when. Some analysts relativize this last rise in the currency and say that it is not so high in real terms, because it follows inflation, and it was the fourth of its kind since 2020.

Another move by Massa, this Thursday, was to sit down to talk with businessmen, unions and social movements. He has indicated that he wants to make a “price stability” deal for the next 90 days, once things are calmer.

“I don’t think this has any influence on the dollar”, says economist Matías Surt, who is critical of the measure. “We already have prices under control since the end of last year and inflation is rising the same. It is something that has already been tried millions of times in Argentina.”

In the electoral race, who benefits most from the economic chaos is the ultraliberal deputy Javier Milei (Liberdade Avança). His main proposal is the total dollarization of Argentina, seen by some as daring and by others as surreal, due to the lack of reserves in the country.

The idea was the main target of a lecture given by Vice President Cristina Kirchner this Thursday, in addition to the IMF, treated as a villain by Peronism. She is still a mystery about a possible candidacy, and her Frente de Todos coalition continues between fights and without a defined name.

The same is true of the opposition alliance Together for Change. With the withdrawal of former president Mauricio Macri, the main names quoted are Patricia Bullrich, former president of the Progressive Party, and Horacio Larreta, governor of the federal capital.

At least until August, when the primaries take place, Argentines remain uncertain. “We’re used to living like this,” says air-conditioning technician Javier. “We are calm because we were world champions”, teases his assistant and brother-in-law, Demian Eloy, 18.