Can control a float Argentina Managed Exchange Rate Without Increased Risk?

Mar 2, 2009

The closure of the last week has not brought good news for Argentina. Andalusia data on the sharp drop in the primary fiscal surplus in the month of January (which recorded a low of 41% over the same month of 2008) and the estimated sharp decline in industrial production (from 9% to 10%) was added to the decision of the rating of risk that Morgan Stanley was considering the emerging economy of Argentina to the border economy.

Not surprising that the Argentine economy is experiencing a sharp slowdown in growth and a significant deterioration in both its fiscal and external results. What does surprise is that this deterioration has occurred before the more that was supposed to.

The Argentine economy is experiencing major tensions are increased day by day, for which there seem to be enough small corrections in economic policy. Faced with the obstacles that are emerging, the Argentine government is responding with measures that provide an immediate solution but require complementary actions consistent long term.

Thus, as commentators in a previous article, the redemption of debt (which is currently being carried out the international section), has been a good measure to decompress the program this financial year and also next year.

According to the published site argentino "La Nación", from the Argentine government would also be allowing the dollar amount in order to bring it towards the end of the year to a level close to $ 4.00. Thus, the government improve its tax collection and prevent a deeper deterioration in external accounts.

On the day of Friday, February 21, the price of the currency closed at U.S. $ 3.55 for the peak retail selling, or four cents above the close of the previous week. So far this year, the value of the dollar in Argentina grew by 2.5% (an increase of almost 10 cents).

The intention of the government that the dollar gradually increase is evidenced in the increase mentioned that American currency experienced in such a short time increase allowed by the Central Bank of Argentina (BCRA), which has sufficient reserves to maintain stable the dollar if you want.

While this dynamic time in the dollar would have been avoided by the BCRA, the monetary authority feels comfortable with the changes it has seen. BCRA is that for the dollar continue to rise in the current economic situation does not represent greater risks in terms of inflation. Is that the 'transfer effect' of the devaluation of the Argentine peso to domestic prices is minimal given the depressed domestic demand and external.

But the expected devaluation of the Argentine peso could bring risks for the actions of speculators who seek to take advantage of this opportunity. Furthermore, given a greater assurance that the government's goal is to bring the dollar to a level close to $ 4 will increase the demand for individuals who see the U.S. currency in a safe in these times of uncertainty. Worth remembering that individuals had significantly increased their demand for dollars in the most turbulent times for the Argentine economy during 2008 even though the loss of wealth it represented to an exchange rate that had behaved towards low and coexisted with an inflation rate above 30%.

However, the risk of a run on the peso in Argentina is limited given the fire power of the BCRA that would firstly throwing hand in their reservations and, if necessary, act to limit the demand for dollars by regulatory change currency.

Probably not expect to be given the devaluation of the exchange rate in the present context involves huge profits because they are constrained by the recession of the global economy and bad years for the agricultural sector, severely affected by drought . One can even think that would be greater risks to bear such as the potential benefits.

Nor should it suggest that the managed devaluation of the nominal exchange rate will mean a substantial improvement in the real exchange rate. Moreover, if we consider as likely to occur, the data for inflation expectations for the next 12 months obtained in a survey conducted by the Universidad Torcuato Di Tella, which indicates an expected average value of 32.8% (and a median of 25 %), we find that a dollar to $ 4, the real exchange rate appreciated by over 10%.

Anyway, given the current economic climate, the level of inflation more likely to Argentina in 2009 to around 15%. With this level of inflation, and considering an exchange rate to $ 4 at the end of the year, the real exchange rate in Argentina would remain broadly unchanged.

The managed float like what happened with the restructuring of the debt secured loans, may provide temporary relief to the Argentine economy. But the Argentine government must soon begin to carry out measures to resolve the tensions faced by the economy, from its roots as they appear with increasing intensity.

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