Contrary to what is happening in the rest of emerging markets Argentine government efforts to weaken the peso are working. In the past three months the peso has declined 0.8% against the dollar, while for Mercosur associates Brazil and Uruguay their currencies have strengthened in the range of 3 to 5%.
Argentine central bank President Mercedes Marco del Pont said early September that the institution seeks to maintain a “competitive” exchange rate after dollar inflows climbed to a two-year high of 392 million USD in the second quarter, the second time since 2008 that flows were positive.
The bank, which doesn’t target a benchmark lending rate, buys dollars in the local foreign exchange market and limits appreciation by requiring investors deposit 30% of the funds brought into the country for one year.
The dollar inflows followed Argentina’s completion of a 12.9 billion US dollars defaulted debt swap in June and after grain exporters began selling a record 55 million metric ton soybean harvest.
Argentina’s peso dropped 0.2% on September 24, the most in five weeks, to 3.9601 per dollar, extending its decline this year to 4.1%. The central bank said in its daily e-mail statement that reserves reached a record 51.3 billion USD.
President Cristina Fernandez de Kirchner last week confirmed Marco del Pont in her post that was set to expire September 23. She has backed the government’s use of 6.6 billion US dollars in international reserves to pay debt this year and Economy Minister Amado Boudou presented lawmakers with a plan on September 16 to tap another 7.5 billion in reserves to make debt payments next year.
Paying debt with reserves fuels inflation by freeing up budget money for other uses, said Claudio Loser, a former International Monetary Fund official. Consumer prices in Argentina are set to rise 25% this year, more than double the official rate of 11.1% and the most in the world after Venezuela, according to former central bank President Alfonso Prat-Gay.
The Argentine budget currently under consideration in Congress forecasts the peso falling to 4.1 per dollar next year, or 3.6% from last week’s close of 3.9518 per dollar. The economy is forecasted to grow 8.9% this year, the most since 2005, according to the government’s budget proposal.
Brazil on the other hand has failed to contain the Real six-week advance given the flood of US dollars entering the market. Brazilian central bank President Henrique Meirelles stepped up dollar purchases to the highest in almost a year this month to temper gains in the Real. The bank bought 5.9 billion US dollars in the first 12 business days of Sept, Altamir Lopes, head of the bank’s economic department, revealed a week ago. Purchases are the biggest since October 2009, when policy makers bought 6.3 billion.
Argentina’s peso has weakened 28% since former president Nestor Kirchner, began his four-year term in May 2003, and was followed by his wife Cristina Kirchner in 2007. The policy has been to seek a weaker currency to bolster domestic industries and export revenue. In addition to requiring investors to deposit cash at the central bank, the government has also limited gains by maintaining caps on utility prices and taking over companies and private pension funds.
However this has been reflected in foreign direct investment which in Argentina (South America’s second largest economy) totalled 4.9 billion in 2009, compared with 26 billion in Brazil and 17 billion in Chile, according to the United Nations Economic Commission for Latin America.