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Peso crisis highlights fragility of Argentina's economy

Sunday, May 20, 2018

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BUENOS AIRES, Argentina (AFP) -- Argentina appears to have resolved, at least in the short term, the crisis over the peso and its depreciation by taking drastic action — but analysts warn the policy is untenable over time.

To sustain the Argentinian peso, the central bank raised its benchmark interest rate up to 40 per cent and injected more than US$10 billion into the economy.

A crisis of confidence in the peso saw it plunge nearly 20 per cent over six weeks as investors concerned by Argentina's high inflation yielded to the lure of a strong US dollar.

On Monday the unit dipped to a historic low of 25.51 against the US dollar, as talks continued with the International Monetary Fund for a stabilising loan.

Argentina's centre-right president, Mauricio Macri, has sought to be reassuring, saying Thursday that “we consider the turbulence overcome”.

But he pointed the finger at an endemic problem: the budget deficit of Latin America's third-largest economy — even though it has dropped from six to four per cent of gross domestic product since he took power in late 2015.

“It's a real structural problem, well -identified for a long time by the IMF, difficult to resolve politically,” said Stephane Straub, an economist at Toulouse School of Economics.

“If rates remain at this level, it will pose problems in the medium to long term. But confidence must return in order to reduce the rates. That's where the intervention of the IMF can be useful, to bring back confidence and halt the flight of capital and the pressure on the currency.”

Annual inflation, at more than 20 per cent, and a balance of trade deficit still stifle economic reform efforts in an economy whose annual growth was 2.8 per cent in 2017.

For Argentine economist Matias Carugati, the recent instability in foreign exchange rates reflects “a crisis of confidence due to the fact that Argentina is quite a fragile economy”.

An interest rate of 40 per cent “is not sustainable in the medium term. It is a very short-term rate to reassure the exchange market”.

Strangled by debt during the economic crisis of 2001, Argentina was declared in default. Since then, any economic turbulence reminds Argentines of a painful episode in the country's recent past.

NO CONDITIONS

Macri's centre-right government, elected in 2015, has insisted that the measures are temporary — a time to clean up the economy after years of mismanagement — and that liabilities remain moderate.

But Argentina's indebtedness has exploded over the past two years, and the Opposition is worried.

The recent issuance of very attractive treasury bonds to investors is further accentuating debt.

For Carugati, there is no reason to panic “if it's a one-off, it's not recurrent. If the situation stabilises there will be room to issue bonds at a lower rate, but it could also push the economy into recession.

“Argentina has no solvency problem as long as there is medium-term economic growth and inflation that move to normal levels, and fiscal adjustment. If that's possible, we'll see.”

Argentina's 42 million people are anxious to see the economy recover, abut many doubt the intervention of the International Monetary Fund, and the strict budgetary conditions that the organisation traditionally requires.

Macri appealed for help from the Washington-based institution, but in the form of a loan. He insists the organisation will not dictate terms.

“No one will impose conditions,” he said. “They will all tell us how much the deficit must be reduced, but it is up to us decide how to reduce it.”

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