Argentina’s recently-elected president Mauricio Macri has followed through on a key campaign promise: to lift currency restrictions and let the peso float. The “dollar clamp,” imposed in 2011 by former president Cristina Fernández de Kirchner amid high inflation to slow the loss of central bank reserves, is now over. Instead of a dual system with an overvalued peso at the official rate (prior to Thursday at just under 10 pesos/dollar) and a separate illegal but tolerated black market rate (at about 14.5 pesos/dollar), Macri’s economic team is attempting to have a single official rate accepted by all, with minimal central bank interference. And in one day, much of that transition went smoothly. At the close of official currency trading on Thursday, the peso depreciated by roughly 30% from the official rate to approximately 13.9/dollar.
Finance Minister Alfonso Prat-Gay said on Wednesday that the central bank is ready to intervene should declines in the peso spiral out of control. But on Thursday trading was orderly, as the devaluation was widely expected.
Macri’s administration expects the loss of dollar reserves will be far outweighed by boosted exports (particularly agricultural stockpiles) and foreign investment into the country. According to Prat-Gay, Argentina is on track to obtain between $15 billion and $25 billion in fresh inflows from three sources. An accord with grain exporters will bring in $400 million a day from farm sales for the next three weeks, while the government expects to raise more than $5 billion in financing from banks purchasing a central bank note. Additionally, the central bank will convert the equivalent of $3.1 billion of yuan obtained in a currency swap with China into dollars to boost liquidity in reserves.
But the government’s biggest challenge is to limit price-hikes for consumers across the economy on top of still-high inflation (estimated at about 25% annually) that has yet to be tamed. The Wall Street Journal reported that retailers and their suppliers have been marking up prices in anticipation of a devaluation. “We raised our prices by 40% before the exchange-rate changes so we wouldn’t lose money,” said Marcela Ledesma, who runs a retail store selling imported orthopedic equipment.
For foreign tourists, the new free-float reality is mostly bad news in practical terms. Credit cards, debit cards, and ATMs use the official rate, but exchanging dollars (or euros) in cash on the black market used to give almost 50% more purchasing power. The rates would vary slightly day-by-day, and by location within the country, but the black market was very widespread and not dangerous to use. (The rates I received for the dollars I changed in Argentina in late November were 13 pesos at a restaurant in a small town, and 14.5 pesos from a bookstore in a larger touristy city.) But from now on, there won’t be a major way to game the system, and as the official rate rises, so will many prices across the economy.
Macri still has much work to do to restore the country to free-market fundamentals, i.e., by slowing inflation, trimming subsidies, and negotiating with foreign holdout creditors. But Argentines are used to rapid economic changes, so the effects won’t be too disruptive. And a “return to normalcy,” along with renewed trust in institutions and confidence in the economy — by Argentines and foreign investors alike — is well worth the short-term road bumps.