Argentina has hiked interest rates for the second time in a week after more than $5bn of central bank intervention failed to stop a steep fall in the peso, in a worrying reminder of Argentine financial volatility. The country’s central bank on Thursday again took markets by surprise as it raised interest rates by three percentage points to 33.25 per cent, just six days after it had lifted them from 27.25 per cent. A rally in the US dollar and the prospect of rate hikes by the US Federal Reserve have sapped emerging market currencies worldwide, with JPMorgan’s emerging markets currency index falling 6 per cent since the end of February. But few currencies have been as hard hit as the Argentine peso, which has lost around a quarter of its value over the past year. It hit a fresh all-time low on Thursday, breaking through the barrier of 22 pesos to the dollar after slumping more than 3 per cent in early trading on Thursday. The 100-year bond that Argentina issued to much fanfare in June 2017 slipped further to trade at a new low of 86.90 cents on the dollar. President Mauricio Macri’s government has sold more than $100bn of bonds on international markets since it came to power two and a half years ago. “The central bank is in charge of the situation,” Marcos Peña, the cabinet chief, told reporters on Thursday. “Situations of volatility [like this] shouldn’t scare us: they have to be part of learning to live with a floating exchange rate.”
A stronger dollar will make it more expensive for Argentina to service its foreign debt, which has grown sharply since Mr Macri took power as he has financed his “gradualist” economic programme to reduce Argentina’s bulging fiscal deficit. Although the initial sharp slide in the peso last week was triggered by foreign investors unwinding positions in local debt instruments ahead of a new capital gains tax, the problem was compounded by edgy Argentine savers who then rushed to dollarise their savings. “There is an inbred paranoia that the currency is going to go haywire at any point in time,” said Walter Stoeppelwerth, head of research at Balanz Capital, an investment bank in Buenos Aires, pointing out that only 17 years ago the peso was at par with the dollar. “Argentines are more sensitive to foreign exchange risk than any other nation on earth except perhaps Venezuela.” The nervousness among Argentine savers has not been helped by a broader feeling of fatigue with the government’s programme aimed at “normalising” the economy, after inheriting a complex scenario from former leader Cristina Fernández de Kirchner. “People are tired with the adjustment, it feels like it will never end,” said Luis Secco, an economist, pointing to continued utility tariff hikes as the government attempts to phase out unsustainable subsidies implemented by the previous administration. He also criticised the failure of the authorities to clarify the situation to the markets. “There is a lack of expectations management, the market is feeling a bit orphaned. No one is very clear why the central bank is doing what it is doing,” added Mr Secco.
Date: 3 May, 2018