Given the increasing macroeconomic misalignments, we maintain our view of a further currency devaluation after the October presidential election
In recent weeks, the Argentine peso has faced significant foreign exchange (FX) pressures again. This is mainly attributed to expansionary measures taken after the August devaluation, the central bank’s limited capacity to defend the currency due to its negative net reserves, and the prevailing high political uncertainty and adverse global outlook. Given increasing challenges in accessing the FX market and tightening capital controls, companies should expect the challenging operational environment to continue. As we have been emphasizing since August, amid persistently high inflation pressures, an anticipated further devaluation post-election, and a dimming employment outlook, clients should revise their 2024 hard currency targets. This revision should consider revenues in local currency and the difficulties in passing the depreciation rate onto prices without affecting market share.
- On August 14, following the primaries, the government devalued the currency by 22%, setting the official exchange rate at 350 ARS:USD. Since then, the administration has kept the official rate unchanged, while the parallel exchange rate or “dollar blue” has slumped approximately 38% (from 685 ARS:USD to 945 ARS:USD).
- The parallel rate is approximately 2.7 times the official rate, resulting in an FX gap of around 170%. The current gap surpasses the previous historic high of 152% following the resignation of Economy Minister Martin Guzman. Without a credible and clear stabilization program, this gap is expected to continue widening throughout 2023 and early 2024.
- Argentina’s negative net reserves signal limited external liquidity for defending the currency. Recently, the government introduced the Soja IV and Vaca Muerta FX regimes, which offer preferential rates to somewhat help alleviate currency pressures. However, the central bank’s net foreign currency purchases in September amounted to only US$ 522 million, significantly lower than in previous months when similar preferential rates were introduced.
Recent macroeconomic policies, including implementing a fixed FX regime, negative monetary policy rates, and expansive government spending, have exacerbated the country’s macroeconomic misalignments. Thus, we forecast an end-of-year official exchange rate of approximately 546 ARS:USD. This projection suggests a one-off devaluation of around 35% in the upcoming weeks, with an increasing probability of a third devaluation by the end of the year. In 2024, the outlook continues to carry significant uncertainty given Milei’s unclear fiscal adjustment plan and unfunded dollarization program. The anticipated unification of the FX market suggests a 2024 year-end rate ranging from 944 ARS:USD to 1,193 ARS:USD. Regarding inflation, preliminary results indicate that monthly inflation in September will likely fall around 11%. We predict a sustained price rise, with annual inflation reaching approximately 175% by the end of 2023. For 2024, our base-case scenario projects an average annual inflation rate of 159%. However, similar to our FX perspective, our outlook is influenced by substantial upside risks with an escalating likelihood of hyperinflation due to pronounced macroeconomic imbalances and waning peso demand.
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