Argentina: Peso Devaluation

Run-off elections on November 22, 2015 saw the centre-right opposition leader Mauricio Macri secure the vote to succeed incumbent Cristina Fernández de Kirchner as President, ousting the Peronist party. In his first weeks of office, Macri removed agricultural taxes, cut government levy on incomes and announced a US$500mn oil investment plan. In November 2011, currency controls were introduced by the Peronist party to prop up the peso and protect foreign currency reserves. However, exports became less competitive as a consequence, which exacerbated the shortage of US dollar liquidity in Argentina and led to the creation of a thriving “blue-dollar” rate in a parallel market. On December 16, the Finance Ministry announced that these controls would be lifted, effective immediately, and the peso will freely float, a move considered essential in order to revive the stagnant economy. Unsurprisingly, the exchange rate suffered an abrupt devaluation to 13.78 pesos per US$. The government expects economic reforms to replenish FX reserves, which had been drained to defend the artificially high currency. The devaluation of the peso, though, is not without risk. Some warn that monetary conditions could need to be aggressively tightened in the event the currency spirals downward. In addition, high inflation, a product of poor monetary management, could spike if investors lose confidence in the peso.

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