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Argentina faces mounting pressure to devalue its currency again as its government struggles to avoid economic collapse ahead of elections in October, following the shock presidential primary victory of a radical rightwing candidate.
The black-market dollar, which is a staple of Argentine life, has jumped to almost double the new official exchange rate after an 18 per cent devaluation of the peso following the primary win by outsider candidate Javier Milei.
At the current black market rate of about 705 pesos a dollar, the largest denomination peso banknote in circulation is worth less than $3, forcing Argentines to carry around large wads of notes. The official exchange rate stands at 361 pesos to the dollar.
“[Economy Minister Sergio] Massa’s path to avoid a collapse before the election is getting narrower, shakier and more winding,” said Salvador Vitelli, head of research at Romano Group in Buenos Aires. “The problems are getting worse and the possible solutions just end up bringing more problems.”
Voters felt an immediate shock to their wallets after Milei’s victory on Sunday. Prices for consumer goods rose by double digits overnight as the government devalued the peso and raised interest rates to 118 per cent a year in a desperate bid to restore confidence.
Sudden price leaps of more than 20 per cent were reported on laptops and other electronics items, as shops rapidly marked up imported goods to compensate for the peso’s latest downward lurch.
In a sign of the pressure on the government, Argentina on Tuesday announced a plan to suspend beef exports for two weeks in order to limit domestic price rises after the devaluation, but walked that back hours later.
The South American nation’s economy was already in dire straits before the primary, with inflation of more than 100 per cent a year; about 40 per cent of people living in poverty; and a recession looming. With the incumbent Peronists relegated to third place in the primary, Massa — who is also the Peronist presidential candidate — faces an uphill struggle to hold the economy together until October’s presidential and congressional votes.
“This looks like mission impossible,” said Alberto Ramos, chief Latin America economist at Goldman Sachs. “It seems very, very unlikely that Massa or anyone else will be able to fix the economy in a short period of time.
“Things have deteriorated so much, the imbalances are so large that we may have lost the ability to manage the adjustment. Things will be chaotic.”
Massa’s immediate challenge is to secure final approval from the IMF board this month for the latest $7.5bn instalment of a $44bn bailout package. Monday’s devaluation will help smooth the way, as the fund had pushed for such a move for months. Few believe the IMF is ready to pull the plug on Argentina, its largest debtor, so the fresh money will probably come.
Massa had resisted a devaluation for months despite mounting pressure on the exchange rate. He has insisted he will not repeat the exercise before the election, a pledge few believe he will be able to keep.
The most pressing problem, however, is inflation. In common with other economists, Vitelli at Romano Group is now forecasting monthly inflation of 12-16 per cent in August and September. Some economists say this would bring the annual rate close to 180 per cent by October and tip the economy closer to a hyperinflationary spiral.
“The devaluation of the currency and the hike in interest rates is not going to solve the problem,” said Edwin Gutierrez, the London-based head of emerging market sovereign debt at Abrdn, which owns dollar-denominated Argentine debt.
“It’s putting a bunch of plasters on to try to survive until the first set of elections . . . every devaluation comes with higher inflation and the currency becomes more uncompetitive.”
Milei has advocated radical free-market solutions such as dollarising Argentina’s economy, closing the central bank and slashing public spending. His narrow first place in the primaries, seen as a dress rehearsal for October’s elections, has introduced an additional element of uncertainty for already jittery markets.
“A lot will also depend on what the candidates say, in particular Milei,” said Amilcar Collante of La Plata national university. “If we have a careful Milei, who explains his plans well, the economy will avoid collapse. But it will be different if Milei, or the people around him who are not very well known, start to say things that generate more commotion in what is already a very fragile market.”
The outcome of October’s election remains highly uncertain, with the Argentine electorate split into three roughly equal blocs: Milei’s voters, those of the mainstream centre-right opposition whose candidate will be Patricia Bullrich, and the incumbent Peronists.
With no candidate close to the level needed for a first-round victory, a run-off in November seems assured. Although the Peronist vote slumped to roughly half its level in the last presidential election in 2019, Massa has insisted he can still win in a country with a strong leftwing tradition.
“Massa’s political skill is going to be an important factor in the next few months,” said Martín Rapetti, director of economics consultancy Equilibra in Buenos Aires. “Although his primary result was bad, the triple tie still puts him in the game to get to a run-off.”
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