We maintain our view of further currency devaluation after the presidential election and more severe inflation pressures in H1 2024
Given difficulties accessing the FX markets and tightening capital controls, clients should anticipate a continuously challenging operational environment in the coming months. Furthermore, companies should revise their 2024 hard currency targets, as they might become more challenging to achieve, especially when considering revenues in local currency and the difficulties of adjusting prices to the depreciation rate without affecting market share. Finally, multinationals should employ scenario-based planning to identify potential threats to the sustainability of local operations and include trigger points related to hyperinflation, magnitude of fiscal shock, and debt default.
Overview
- The government plans to maintain the official exchange rate at 350 ARS:USD until mid-November. Meanwhile, parallel exchange rates are significantly above this level. The “dollar blue” is around 1,075 ARS:USD, while the dollars MEP (for local bond transactions) and CCL (for overseas bond operations) stand at approximately 850 ARS:USD.
- Although the FX market is relatively stable after the notable spike before the first round, the parallel rates are approximately 2.5 times the official rate, resulting in an FX gap of around 150%. Moreover, our estimates of Argentina’s net reserves are around US$ 7 billion. Thus, to boost net reserves, the government has recently implemented new preferential FX regimes, which allow exporters to trade 70% of the exported goods at the official rate and 30% at the CCL dollar.
- In September, Argentina’s CPI rose by 12.7% MOM, marking the second consecutive month of a double-digit rate, and annual inflation stands at 138.3%. The primary inflation drivers were notably higher prices for clothing and footwear (15.7% MOM) and food and non-alcoholic beverages (14.3% MOM).
Our View
The economy declined by 1.1% YOY in H1 2023, driven by a significant contraction in exports due to adverse climate conditions and the decline in consumer spending given high inflation pressures. We expect this negative trend to continue throughout the coming months, marking a drop of 2.2% YOY in 2023 and 2.0% in 2024. The ongoing decrease in consumer spending and private investment is expected to persist in 2024, with declines of -4.5% YOY and -5.3% YOY, respectively. Moreover, the fiscal consolidation program will reduce government spending by -2.3% YOY, while climate risks could limit the anticipated strong recovery in export growth to 8.9% YOY. Substantial upside risks influence our inflation and FX outlooks due to increasing macroeconomic misalignments. We expect an end-of-year official exchange rate of approximately 546 ARS:USD for 2023 and project a 2024 year-end rate ranging between 944 ARS:USD and 1,193 ARS:USD. Lastly, we predict persistently high price pressures, with annual inflation projected to reach 175% by the end of 2023 and an average annual inflation rate of 159% for 2024.
On the economic front, FrontierView recommends monitoring the following signposts:
- Likelihood of hyperinflation: Given two-digit monthly inflation, an inevitable devaluation in the coming months, and high political uncertainty, there is an increasing probability of hyperinflation, typically defined as prices increasing over 50% MOM. While we expect the new administration to provide a stabilization program for 2024 that will somewhat reduce the likelihood of a major inflation crisis, significant price pressures will persist throughout 2024.
- FX gap and central bank net reserves: Presidential candidate Javier Milei’s unfunded dollarization approach and the current administration’s monetary policy present significant short-term FX pressures, widening the FX gap. Thus, critical signposts to monitor are the trajectory of the FX gap and the level of the central bank net reserves, as they represent the liquidity and ability to implement Milei’s monetary program or maintain the current system.
- Fiscal vulnerabilities: Projections indicate that the primary deficit in 2023 should be around 3.8% of GDP. As part of the stabilization plan, the new government will have to apply a fiscal adjustment, which could significantly reduce social benefits, economic subsidies, and privatizations. Clients should closely monitor the fiscal deficit level by the end of the year and the new administration’s strategy to achieve a fiscal consolidation path.
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