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Argentina faces renewed pressure to devalue currency as government struggles to avoid economic collapse ahead of October elections after radical right-wing candidate wins shock presidential primary are doing.
The black market dollar, a staple of life for Argentines, has fallen to almost 2% of the new official exchange rate after the peso devalued 18% following the victory of outsider candidate Javier Milay in the primary. soared to double.
At the current black market rate of about 705 pesos to the dollar, the largest denomination peso note in circulation is worth less than $3, forcing Argentines to carry large wads of cash. The official exchange rate is 361 pesos per dollar.
“[Economy Minister Sergio] Massa’s path to avoid pre-election collapse is increasingly narrow, precarious and winding,” said Salvador Vitelli, head of research at Romano Group in Buenos Aires. “The problem is only getting worse, and possible solutions only end up creating more problems.”
After Millay’s victory on Sunday, voters immediately sent a shock to their wallets. Consumer goods prices rose by double digits overnight as the government devalued the peso and raised interest rates to 118% a year in a desperate effort to restore confidence.
Prices for laptops and other electronic devices have reportedly surged by more than 20% as retailers sharply raised prices on imported goods to compensate for the recent depreciation of the peso. In another emergency measure, the government on Tuesday suspended beef exports for two weeks to prevent a sharp rise in domestic prices after the devaluation.
Even before the primaries, the economy of this South American country was already in dire straits, with annual inflation exceeding 100 percent. About 40 percent of people live in poverty. and impending recession. With the incumbent Peronist demoted to third place in the primary, Massa, who is also a Peronist presidential candidate, faces an uphill battle to keep the economy running until October’s presidential and congressional votes.
“This is like Mission Impossible,” said Alberto Ramos, chief Latin America economist at Goldman Sachs. “It seems very unlikely that Massa or anyone else can get the economy back on track in the short term.
“The situation has deteriorated so badly that the imbalance is so great that they may have lost the ability to manage their adjustments. Things will be chaotic.”
Massa’s immediate challenge is to get final approval from the IMF board this month for the latest $7.5 billion installment of the $44 billion bailout. The fund has been pushing that move for months, so Monday’s devaluation will help smooth that path. Few believe the IMF is ready to lift sanctions on its largest debtor, Argentina, so new money will probably flow in.
Massa has resisted currency devaluations for months despite mounting exchange rate pressures. Although he insists he won’t repeat the exercise before the election, few believe he can keep his promise.
But the most pressing problem is inflation. Like other economists, Romano Group’s Vitelli now expects monthly inflation of 12% to 16% for August and September. Some economists say this will bring the annual rate closer to 180% by October, pushing the economy closer to a hyperinflationary spiral.
“Currency devaluation and interest rate hikes are not going to solve the problem,” said Edwin Gutierrez, head of London-based emerging markets sovereign debt at Abdon, which holds dollar-denominated Argentine government bonds.
“We put a lot of bandages on to survive until the first elections…A currency devaluation would be accompanied by higher inflation, making the currency even less competitive.”
Millais has advocated radical free-market solutions, including dollarizing Argentina’s economy, closing the central bank, and cutting public spending. His narrow first-place finish in what appears to be a rehearsal for the October election adds another element of uncertainty to an already nervous market.
“A lot will also depend on what the candidates say, especially Millay,” said Amilcar Collante of the National University of La Plata. “With a cautious Millais who explains his plans well, an economic collapse could be avoided. It would be a different story if he started saying things that caused a stir.”
The outcome of October’s general election remains highly uncertain, with Argentine voters split between Millay’s voters, Patricia Bullrich’s main candidate for the mainstream centre-right opposition, and incumbent Peronist voters. It is divided into three blocks of about the same number.
With no candidate close to the level needed to win the first round, a runoff vote in November looks certain. Peronist votes have fallen to about half of what they did in the last presidential election in 2019, but Massa has insisted he can still win in a country with a strong left-wing tradition.
“Massa’s political prowess will be a key factor in the coming months,” said Martin Rappetti, director of Equilibra, a Buenos Aires-based economic consulting firm. “His first-round result was bad, but he could still reach the run-off vote with a triple tie.”