Argentine Devaluation Foreseen in Offshore Peso Gap: Currencies

By Camila Russo and Sebastian Boyd

Photographer: Diego Giudice/Bloomberg

Pedestrians walk in Puerto Madero, a former river harbor complex in Buenos Aires,... Read More

For foreign-exchange traders, another devaluation of Argentina’s peso has become all but inevitable after July’s bond default.
The gap between the currency’s spot rate and an unofficial rate used in offshore bond trading widened to a record 5 pesos this month. That compares with almost 4 pesos just before Argentina devalued by 14 percent in January in an attempt to prop up its dwindling foreign reserves. Strategists surveyed by Bloomberg expect the peso to weaken 10.3 percent by year-end to 9.37 per dollar, the most among 39 peers.
Argentina’s peso is already the worst-performing major currency of 2014, plunging 22 percent amid a shrinking economy and a debt default in July that
accelerated the flight of capital from the country. The government has accused foreign investors of trying to engineer a devaluation on their own, boosting speculation that Argentina is providing a tacit admission that it’s already preparing for the worst.
“They will devalue, but not before Christmas,” Siobhan Morden, the head of Latin America fixed income at Jefferies Group LLC in New York, said in a Sept. 11 phone interview. “It would make imports more expensive before the holiday shopping period. It’d be in January or February.”

Capital Controls

Because capital controls mean the peso can’t readily be traded, other levels give a more realistic indication of the currency’s value than the official spot rate. The central bank controls that rate, which closed yesterday at 8.4013, by buying and selling dollars on an almost daily basis.
The peso’s value in the so-called blue-chip swap market, where traders buy peso securities and sell their dollar equivalents overseas to skirt Argentina’s controls, reached an all-time low of 13.4327 on Sept. 8. The gap with the spot rate reached its widest ever the same day, and was at 4.9 pesos yesterday.
Non-deliverable forwards, which allow traders to bet on the future price of the peso, have weakened 3.4 percent in the past month and suggest a decline of 14 percent over the next four months to 9.77 per dollar, data compiled by Bloomberg show.
The peso’s black-market rate, which is the only way most Argentines can buy hard currency, plunged to a record 14.45 per dollar yesterday, according to the Ambito Financiero newspaper.

Peso ‘Adjustment’

“They’ll be forced to devalue to bring about an adjustment” between the peso’s official and unofficial rates, Nicolas Jaquier, a London-based economist at Standard Life Investments Ltd., which oversees about $425 billion, said by phone on Sept. 8.
The peso’s spot rate is proving unsustainable amid Argentina’s shrinking economy. Gross domestic product contracted 0.2 percent in the first quarter, the most in almost two years, while the budget deficit increased by four times in June from a year earlier to 16.7 billion pesos ($2 billion.)
Against all this, government spending surged 56.6 percent in June from a year earlier, and annual inflation, for which official figures aren’t published, accelerated to 40 percent in August, the highest among major economies after Venezuela, according to data from opposition lawmakers.
Argentina may choose to hasten the decline of the peso in the currency markets instead of a one-time devaluation, according to Sebastian Vargas, an economist at Barclays Plc in New York. The bank sees a slide to 9.37 by Dec. 31, in line with the median of 15 estimates in a Bloomberg survey of strategists.

Impossible Predictions

“It’s impossible to predict what they’ll do,” Vargas said by phone on Sept. 11. “But what’s for sure is, one way or another, we’ll have a weaker exchange rate by year-end.”
Economy Ministry press officer Jesica Rey didn’t immediately respond to an e-mail yesterday seeking comment.
Argentina devalued the peso by 14 percent over a three-day period in January after it was forced to tap its reserves to compensate for international capital fleeing the economy, South America’s largest after Brazil.
The foreign-currency holdings, which the government relies on to finance debt and pay for imports, plunged $2.9 billion that month, the most since 2006, when the county settled all its debt with the International Monetary fund in a single payment.
While reserves stabilized after the devaluation, they’ve fallen again since July, when the government of President Cristina Fernandez de Kirchner missed a deadline to pay interest on $13 billion of bonds. The central bank’s foreign-currency holdings stood at $28.4 billion last week, about the lowest since May.

Condemning ‘Vultures’

Economy Minister Axel Kicillof said in a speech to lawmakers on Sept. 9 that holdout creditors are putting pressure on the peso with the help of local businessmen and the media, and are “working to get a devaluation.”
The government has strengthened capital controls to avoid just that end result. In recent months, officials have reduced the amount of foreign currency banks can hold to 20 percent of liquid assets from 30 percent, and authorities now informally require lenders to seek authorization for dollar purchases of $150,000 or more.
“We expect the official rate to be devalued to 10” pesos per dollar “late this year or early next,” David Rees, an economist at Capital Economics Ltd. in London, said in a Sept. 8 phone interview. “It depends on how much capital flight and pressure on reserves there is in coming weeks and months, and on inflation.”