The unexpected rise of the dollar worries Argentina

Argentines live pending the dollar. Groundwork during the semester, which remained almost frozen, field and industry warned of the loss of external competitiveness as investors are rubbing their hands with the financial cycle, allowing unmatched dollar earnings. The sudden devaluation of the peso in the last month and a half – has lost more than 11% of its value against the US-currency now occupies the front pages of every newspaper in the country. Concerned that the appreciation of the dollar triggered further inflation and is unknown to what extent influence the vote of the legislative elections of October 22 if, against all odds, kept rising.

It does not bring good memories. Argentines associate if the dollar rises, inflation rises and people not nothing good happens, “says Gabriel Zelpo, chief economist at the consulting Elypsis. Several Argentine emergency, including 2001 started well. Nobody believes that an economic calamity as that is looming, but the Argentines are not used to exchange rate volatility and surprised that the Government of Mauricio Macri allow an escalation of the dollar in full discretionary campaign. The dollar came close to breaking the barrier of 18 pesos on Monday, but selling dollars of public banks prevented and closed at 17.65, as Tuesday.

Austral country’s economy is dollarized. Argentines save in that currency and the housing market is also listed on the US currency. Therefore, any exchange rate movement is followed with great attention. The Government is aware of the concern, as was demonstrated in the last Cabinet meeting held on Tuesday. The rise of the dollar was one of the central themes of the meeting and the finance minister, Nicolas Dujovne, he assured those present that there will be “inflationary spike”.

The dollar touched the barrier of 18 pesos on Monday but closed at 17.65, as Tuesday

Argentina, the most expensive country in Latin America, had in 2016 an inflation rate of 40%, the second highest in the region, only behind Venezuela. The government aims to reduce this year to more than half and notes that in recent months has been declining. “We are facing an profound social change in Argentina’s economy, which has to do with, once and for all, unhook the dollar inflationary issue, and that is being achieved with great success,” he told the media the main System Public Media, Hernán Lombardi, after the Cabinet meeting. But Julio does not bring good news: private consultants expect prices to grow back at least 2%, compared with 1.2% in June.

More competitiveness, less consumption

The IMF welcomed on Tuesday the peso depreciation considering that “helps correct the overvaluation of the currency.” Also held the field, considered the engine of the country. Much of Argentina’s agricultural production is exported and low weight increases its competitiveness against competitors such as Brazil.

Consultants predict that inflation will accelerate in July, up 2% MoM

On the contrary, the real situation is detrimental to employees who lose purchasing power in dollar-denominated assets such as housing. After years in which mortgage lending was restricted to families with higher incomes, Argentina is experiencing a blast of mortgages, which increased by 34% over the last 12 months. But currency volatility complicates the accounts: for an apartment worth $ 100,000, rising liquefied dollar has hit about $ 11,000 purchasing power of credit in pesos.

The real devaluation of the peso does not answer an a single plea. In recent months, the exchange rate misalignments had to do with external factors such as Brexit, Donald Trump’s victory in the US or judicial scandals Michel Temer in Brazil. Now, factors also weigh regions. The rise of the dollar coincided with Morgan Stanley’s decision to maintain an Argentina as a frontier market rather than an emerging ascend and the candidacy of the former president Cristina Fernandez de Kirchner senator. “Kirchner roughage elections and polls that place first appears. That scenario was not fully considered and gave the dollar volatility, “says Zelpo.

The growing demand for dollars for savings and tourism, coupled with the desire of investors to reduce risk and return an active child dollarized other reasons that explain the phenomenon, according to economist Marina Dal Poggeto, executive director of Estudio Bein. Dal Poggeto believes that the rise of the dollar “improving competitiveness, adjust the central bank and the public segment in the immediate picture,” but does not help significantly reduce the financial deficit. Economist doubts that the government stand still if the dollar keeps rising. “I do not let him up, should not let up,” he says. A month ago, analysts predicted all that the dollar would remain stable until after the elections. Again, Argentina again make clear that it is unpredictable.

THE ECONOMY GREW 3.3% IN MAY

Argentina’s economy in May recorded its third consecutive month of growth and improved 3.3% year on year, according to the Monthly Economic Activity Estimator (EMAE) Indec. In parallel, the IMF improved growth forecasts for Argentina from 2.2% to 2.4% for 2017. “In Argentina, the recovery from the recession last year is consolidating, stimulated private consumption receives the progressive upturn wage genuine, and investment is backed by the nascent credit growth and increased spending on public works, “said Alejandro Werner, chief of the IMF Western Hemisphere blog body.