Central Bank devalues peso faster while it fights reserves drop

The Central Bank will allow a faster depreciation of its tightly-controlled peso, in the government’s latest attempt to contain a hemorrhage of foreign reserves.

The insitution is ending a policy of “uniform devaluation” and allowing greater volatility, according to a Central Bank statement sent after hours Thursday. It also announced that it was raising repo rates to 24 percent up from 19 percent and create savings instruments with rates that exceed inflation, as it seeks to encourage citizens to save and invest in pesos.

Authorities offered the peso at 76.95 per US dollar on Friday morning, 0.9 percent weaker than the previous session and a quicker pace of devaluation than the 0.1 percent daily decline of the last three days. With a faster depreciation, the Central Bank also seeks to close the gap between the official peso and the unofficial rate, which closed Thursday at 147 per greenback, on top of giving incentives for exporters to sell their dollars and stabilise the exchange rate.

“Raising the repo rate and abandoning the crawling peg are key, because they attack a huge inconsistency” of having low peso interest rates while maintaining a stable peso depreciation, said Diego Chameides, chief economist at Banco Galicia in Buenos Aires. “That led to a situation where few dollars were sold in the market.”

Argentina’s dollar bonds fell early on Friday, pushing the yield spread over US Treasuries wider by 28 basis points to 13.67 percentage points.

The Alberto Fernández administration announced a slew of new measures Thursday, including cutting taxes on certain exports temporarily, as the central bank is losing reserves at a faster pace in recent days, in part stemming from savers withdrawing dollar deposits from the nation’s banking system. Individual demand for greenbacks intensified after the government tightened capital controls September 15.

Total reserves fell by US$370 million on Wednesday to US$41.4 billion, the lowest level since January 2017, while net reserves are estimated to be below US$5 billion, according to Jpmorgan Chase & Co.

Yet the effort is unlikely to significantly change a situation where investors reject the peso due to Argentina’s high inflation rate and lack of economic policy credibility.

“We continue to see a major imbalance in the monetary system,” Jpmorgan’s analysts Diego Pereira and Lucila Barbeito wrote in a report. “The lack of a consistent and comprehensive program will continue to exert pressures.”

“This is the Central Bank reacting, late, to growing market pressure,” said Goldman Sachs senior economist Alberto Ramos said. “The core of the problem remains the heavy monetisation of large fiscal deficits and poor policy credibility. Until that is fixed there’s no hope of lasting currency and price stability.”

As part of its measures, the Central Bank also said it will allow peso-renminbi trading for certain comex operations and futures contracts in yuan. Still, retail investors won’t be able to trade in the Chinese currency and the monetary authority won’t activate a swap the country has with Asian nation.