Argentina’s presidential hopefuls face conundrum over devaluation

It is possible that the fractured opposition of Argentina disagree on many issues before the next primary elections on August 13, but has rallied around the need to end a system of multiple exchange rates that has spooked investors and crippled the economy.

The two main opposition candidates, Patricia Bullrich and Horacio Rodríguez Larreta, would dismantle the system of differential exchange rates, tailor-made for dozens of daily transactions ranging from the payment of international artists to wine exports.

A third contender, Javier Milei, calls for the less-proven solution of replacing the Argentine peso with the US dollar.

Unlike most other countries, Argentina has an exchange rate that is artificially set by the state, rather than by market demand. This has allowed the widely used parallel foreign exchange market to flourish, with pesos currently trading against the dollar at less than half the official exchange rate.

At the same time, the Government has been restricting access to foreign currency, which is popularly known as “stocks”as a way to prevent further draining of low central bank reserves.

Economists warn that any move to unbundle this highly distorted currency market, while removing the artificial restrictions that are holding back growth and investment, would likely lead to even higher near-term inflation, worsening poverty and an increase in social unrest.

“It is clear that the current exchange rate regime is an obstacle for the economy and has not managed to prevent an acceleration of inflation or preserve exchange liquidity,” said Ignacio Labaqui, a senior analyst at Medley Global Advisors in Buenos Aires.

The main problem for an incoming government lies in the “inflationary consequences”in a country where annual price increases reach 116%, said Labaqui.

In 2015, the center-right former president, Mauricio Macri, fulfilled his campaign promise to let the peso trade freely, causing a 28% devaluation. Finally, in 2019 he had to reintroduce exchange controls in the face of a crisis unleashed in the last years of his management.

Bullrich, Macri’s former security minister, advocates unifying exchange rates and lifting monetary restrictions “since the first day”, according to his economic adviser, Luciano Laspina.

“We need to remove capital controls very quickly. The sooner the better”Laspina said at a recent forum, betting that a sharp devaluation will bring pain in the short term but potentially establish a healthier economy and attract long-term investment.

With that and the support of the IMFwe can build the conditions to restore some credibility in Argentina”Laspina said.

Larreta, the current mayor of Buenos Aires, has a similar goal, but argues that doing it immediately and across all sectors would be too painful for crisis-hit Argentines.

Instead, he proposes closing the gap between the official and parallel listings within his first year in office, according to his campaign website.

Milei is also focused on a solution based on a single currency establishment. “One of the most irritating things we have in Argentina right now are the government restrictions on who can buy dollars and at what price”Diana Mondino, economist and Milei’s chief economic adviser, told Reuters.

But such reforms are unpopular with an electorate already battered by inflation, so the current Peronist administration is holding its ground ahead of general presidential elections on October 22, vowing to avoid a sharp devaluation.

The next administration is unlikely to remove all of these restrictions at once, Labaqui said, even if it is part of his current campaign message.

“What is clear is that there is a consensus among the economists opposed to Together for Change on the need to undertake this task.”

Source: Reuters