beyondbrics

Wiping 20 per cent off the value of the Argentine currency this year “isn’t off the wall”. So says Guillermo Moreno, the internal trade secretary and one of the tough guys in the government of Cristina Fernández.

What is this – rare honesty from an administration that denies the country has a problem with inflation?

(And to get a flavour of what that is like, back-to-school stuff, which has now started appearing in shops before the long summer holidays end in late February, is costing as much as 30 per cent more than last year.)

Well no. The government is loath to admit that there is anything wrong with the exchange rate at all. Here is Página 12, a pro-government newspaper, which interviewed Moreno during an official trip to Vietnam:

Referring to the exchange rate, he [Moreno] said that to think of an exchange rate at the end of the year “of around 6 pesos¨ [to the dollar] , equivalent to a devaluation of between 18 and 20 per cent, would not be off the wall” … Moreno recognised, too, that there are businessmen pushing for higher devaluation. “In meetings one has, out of 80 businessmen there is always someone who can ask for it, but deep down they know that this generates a distributive tension, a drop in consumption and higher prices, and just ends up being worse for companies.

It still looks, mind you, like a tacit admission that the peso is overvalued. Which of course everyone in Argentina knows. For that, you need only look at the euphemistically termed “parallel” dollar rate – the unofficial exchange rate to which Argentines largely have to turn to get their hands on dollars.

The black-market rate has traded as high as 7.54 to the dollar in recent days, though it has dipped a bit. Compare that with the official dollar rate of just below 5 pesos. A devaluation of 18-20 per cent may sound like painful, but it’s academic when you compare that with a 50 per cent gap between what it costs to get your hands on greenbacks.

And no wonder there’s a gap, when the government has been tinkering with official inflation and growth stastics, says Roberto Lavagna, economy minister under Néstor Kirchner, Fernández’s late husband and predecessor. Once the government has blown through the fiscal surplus and trade surplus there will be nothing for it but to bite the bullet and devalue and suffer, he says.

The IMF has threatened Argentina with a “red card” over its dodgy data and has set February 1 the date of a board meeting to decide whether or not to censure the country – a potentially unprecedented step.

So Argentines are looking at the unpalatable prospect of inflation or devaluation, or both, inexorably eating up the value of their pesos this year, even if the unpleasant economic shocks Lavagna refers to remain at bay. What a pleasant prospect. At least the sun is shining for now, keeping the economic gloom in check during the southern hemisphere summer holiday season.

Related reading:
Argentina’s “blue” dollar blues, beyondbrics
Argentina: black market dollar hits new high, beyondbrics
Argentina: more dollar restrictions, beyondbrics
Dollar curbs squeeze Argentine economy, FT