Argentina devalues peso, cuts spending in economic shock therapy

(Reuters) – Argentina will weaken its peso by more than 50% to 800 per dollar, cut energy subsidies and cancel public works tenders as part of an economic shock therapy aimed at fixing the South American country’s worst crisis in decades.

Below are reactions from some analysts and international agencies to Tuesday’s announcement:

VERISK MAPLECROFT:

“Caputo focused on delivering on the key campaign pledges of ‘taking the chainsaw’ to the public sector and ‘reordering’ the economy to lay the foundations for future growth.”

“The reordering of economic variables, together with inflationary inertia and accumulated inflation that had been artificially contained through price controls mean that triple digit inflation will continue to hit consumers in 2024.”

“But by bringing the official FX rate closer in line to the financial, black market, and export-specific rates inherited from the Fernandez administration, Caputo has taken a decisive step towards FX rate convergence, which could be accomplished within the administration’s first six months in office.”

BANCTRUST & CO:

“All in all, we expect bonds to react positively to yesterday’s announcements. The fiscal adjustment is not only sizeable but it also appears to be feasible from a political point of view. The lack of FX unification can hinder disinflation but we think that this will be the second step when seasonally abundant dollar inflows resume with the soybeans harvest from May onwards.”

J.P. MORGAN:

“We believe an evolution of the policy template by second quarter 2024, would be likely required, once international reserves start to be replenished by soybean exports.

“First of all, the fact that the fiscal adjustment relies in a relevant manner on a higher tax collection may induce some doubts, particularly due to the temporary nature of some taxes as well as the need for Congress approval.

“Second, the still hefty correction lower of real expenditure still needs to be assessed through the prism of social tolerance. A new FX correction may be required to finally migrate into a unified exchange rate system, without capital and financial account restrictions other than macro-prudential.”

GOLDMAN SACHS:

“Our first impression of the announcement is positive. Fiscal profligacy is the root of Argentina’s macroeconomic problems and moving swiftly with the fiscal adjustment is utmost important.

“We acknowledge, however, that some of the announced policies remain vague and many lacked quantitative details. The exchange rate, in turn, was highly overvalued and a significantly more competitive exchange rate should allow the central bank to accumulate international reserves that currently stand at critical levels.

“Inflation, however, is likely to accelerate in the coming months as the pass-through of the weaker exchange rate is transmitted to consumer prices. For this reason, it will be critical to know what exchange rate policy the central bank will follow going forward to avoid a renewed overvaluation of the currency.

“This was clearly absent in today’s policy announcement. Another major absent measure was the treatment of the central bank’s remunerated liabilities. In our view, addressing the central bank’s balance sheet should be another pillar of any macroeconomic adjustment plan.”

INTERNATIONAL MONETARY FUND:

“These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime. Their decisive implementation will help stabilize the economy and set the basis for more sustainable and private-sector led growth.

“Following serious policy setbacks over the past few months, this new package provides a good foundation for further discussions to bring the existing Fund-supported program back on track.”

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