Argentines turn to black market dollars as crisis worsens

Confidence in the Argentine economy is evaporating as the government struggles with political infighting, an ever-increasing pile of domestic debt and inflation hurtling towards 90 per cent.

The US dollar has shot to new highs on the black market as Argentines limited to buying $200 per month rush to money-changers to dump their fast-devaluing pesos. On Friday, dollars were selling on the streets of Buenos Aires for 337 pesos, up 15 per cent in just one week.

The rapid deterioration in sentiment and the government’s increasing difficulty in funding itself are raising fears of a full-blown economic crisis similar to those which have wracked the South American grain exporter periodically over the past half century.

“The risk of an acceleration in the pace at which the Argentine economy is worsening is significant,” Citi warned this month.

The gap between the black market dollar and the artificially controlled official rate has widened to more than 150 per cent — a level last seen during Argentina’s hyperinflation in 1989-1990, according to broker Portfolio Personal Inversiones.

Argentina has been largely cut off from international debt markets since its default in 2020. The government is instead funding itself through money-printing and domestic debt, most of which is inflation-linked and comes at ever-higher rates of interest.

President Alberto Fernández has ruled out the prospect of a one-off devaluation. Yet many Argentines and bank economists fear the economy will get a lot worse before it gets better.

“Sales of dollars are crazier than ever,” Adán, 28, who changes money illegally in central Buenos Aires so preferred not to give his full name, told the Financial Times. “The only thing customers don’t want to hold is pesos . . . many ask questions about what’ll happen next.”

The abrupt resignation of economy minister Martín Guzmán on July 2 followed months of squabbling inside the ruling Peronist coalition. It heightened concern over the ability of Fernández’s weak and unpopular government to deal with the fast-deteriorating situation.

“I decided to make a big purchase that I’d been putting off because I knew the markets would go bonkers when the minister resigned,” Paige Nichols, a 35-year old marketing consultant, said while shopping in Buenos Aires.

Guzmán left just three months after negotiating a $44bn debt restructuring deal with the IMF. But his pledges to rein in the budget deficit were strongly opposed by the powerful vice-president, Cristina Fernández de Kirchner and her radical allies. Kirchner believes the Peronists should instead spend more to shield voters from rising inflation ahead of the 2023 presidential race.

Despite Guzmán’s untimely exit, IMF officials believe that the economic targets the fund agreed with Argentina can still be met by his successor, Silvina Batakis, if she moves quickly.

Kristalina Georgieva, the IMF’s managing director, said Batakis understood “the purpose of fiscal discipline” and described a “very good” first call with the minister.

But events risk overtaking Batakis, a little-known figure whom few believe has the political clout to achieve the cuts in energy subsidies and reductions in money-printing that eluded her predecessor. “No measures will be effective until it becomes clear that vice-president Cristina and her group won’t sabotage Batakis,” said political risk group Eurasia in a note.

Inflation, meanwhile, reached 64 per cent a year in June and is forecast to accelerate beyond 90 per cent by the end of the year, according to Morgan Stanley.

Despite high world commodity prices, Argentina’s net foreign currency reserves are hovering at just $2.4bn. Costly energy imports are partly to blame but the country’s grain exporters are also hoarding their harvest because they fear an imminent devaluation, rather than shipping and receiving payment in pesos at the unfavourable official rate.

Argentina’s sovereign debt to private creditors, which was only restructured in 2020, is trading back in distressed territory. And the country is expected to enter a brief recession this year, with contractions in the second and third quarters, according to a central bank survey.

Ignacio Labaqui, senior analyst at Medley Global Advisors in Buenos Aires, said economic factors were only part of problem. “Even if the government announced a coherent economic plan, Fernández lacks credibility,” he said. The ruling coalition has failed to reassure the public: “it is a matter of when they devalue, not a matter of if.”

Two pillars of the IMF deal are to reduce the fiscal deficit over three years and to curb central bank money-printing to fund it. Buenos Aires agreed to these belt-tightening conditions in exchange for a 4-and-a-half-year grace period on IMF payments, with full repayment by 2034.

Argentina is limited to printing 765bn pesos ($5.8bn) for the full year to fund its deficit. But the central bank has already printed 630bn pesos this year, more than half of that over the past month and a half.

In attempt to encourage investors to buy Treasury notes, last week Argentina’s central bank promised investors that if prices fell, the bank would protect the investment. Analysts said this could lead the bank to print even more pesos to back the new guarantee.

An estimated 900bn pesos ($6.8bn) of local currency debt is coming due in September alone. Confidence in the government’s ability to roll over this borrowing is dwindling amid concerns about its ability to pay and a possible imminent devaluation, despite official denials.

Reducing the fiscal deficit before interest payments from 3 per cent of GDP last year to 2.5 per cent in 2022 as outlined in the IMF agreement also looks tough to meet. Energy subsidies, one of the main reasons for the red ink, almost doubled over the 12 months to June, according to Julian Rojo, an analyst at General Mosconi, a local think-tank.

On top of the deteriorating economy is Argentina’s fractious politics ahead of next year’s elections, which the Peronists are likely to lose. “The risk ​of a government breakdown is not negligible in Argentina, given the ongoing economic crisis. The government’s ability to complete the current presidential term is a concern,” Labaqui said.

Additional reporting by Isobel McGrigor in Buenos Aires