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Argentine peso risk rises as crises spark black market rush for dollars

EconomyMay 08, 2020 09:00AM ET
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© Reuters. FILE PHOTO: Argentine one hundred peso bills are displayed in this picture illustration

By Hernan Nessi

BUENOS AIRES (Reuters) - Argentina's peso is in increasingly treacherous waters, with twin economic and debt crises at home driving a huge gap between the official rate kept almost static by capital controls and the tumbling black market and other unofficial rates.

The currency is at around 67 per dollar, with tight controls limiting how much Argentines can convert to foreign currency and a steep tax on any exchange. On the black market, however, dollars are trading at almost 120 pesos.

That marks the widest gap between the two rates since 2014, according to traders and Reuters data, putting major pressure on the official currency and raising the threat of a sharp potential depreciation, analysts said.

"With the current depth of recession, Argentines who want to save will take refuge in safer assets including the informal dollar," said Natalia Motyl, an economic analyst at policy research group Libertad y Progreso in Buenos Aires.

The gap is being exacerbated by the tough currency controls, low real interest rates and the country opening the monetary supply taps to bolster an economy already in recession for two years, which is now being hit by the coronavirus pandemic.

Argentina is also suffering from high inflation, which was over 50% last year, and is teetering on the edge of default as it looks to revamp $65 billion in foreign debt before a May 22 deadline to make an outstanding interest payment.

Goldman Sachs (NYSE:GS) said in a note negative real rates and excess liquidity created by the central bank to finance a deepening fiscal deficit "are putting increasing pressure on the peso".

"We are increasingly concerned that the risks of a large depreciation of the official USD/ARS rate are growing," it said.

For a graphic on Argentine peso strains, click https://fingfx.thomsonreuters.com/gfx/editorcharts/jbyprjxalpe/eikon.png

The central bank has also taken measures to make it harder to access dollars through legal, if unofficial channels, including the so-called "blue-chip swap" used by many in Argentina to gain access to greenbacks.

Officially Argentines can only buy a maximum of 200 dollars per month, with a 30% tax on all purchase of foreign currency.

The South American country's leaders says they intend to loosen currency controls, but only the once the fragile economy has stabilized.

Analysts said pressures on the peso would only get worse later in the year, as the economic impact of COVID-19 kicks in. The government is working on an assumption in its debt restructuring talks of a 6.5% contraction in 2020.

"Most likely during the second half of the year the impact will be felt even more," said Motyl, explaining that "there will be more thirst for dollars due to the terror caused by the loss of the value of the peso."

Economist Horacio Larghi at Argentine consultancy firm Invenómica said the gap to the black market value could also expand beyond the current 80% divergence.

"I am sure that if exchange controls continue to be tightened, the gap with the official rate could undoubtedly exceed 100%," he said.

Argentine peso risk rises as crises spark black market rush for dollars
 

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