Argentina’s presidential hopefuls face devaluation conundrum

By Anna-Catherine Brigida and Lucinda Elliott

BUENOS AIRES (Reuters) – Argentina’s fractured opposition may not agree on much ahead of an upcoming Aug. 13 primary election but it has coalesced around the need to end a dizzying system of multiple exchange rates that has spooked investors and crippled the economy.

Both mainstream opposition candidates, Patricia Bullrich and Horacio Rodriguez Larreta, would dismantle the myriad of preferential rates in Argentina, custom made for dozens of daily transactions ranging from travel expenses to wine exports.

A third contender, Javier Milei, is calling for the more untested solution of replacing the Argentine peso with the U.S. dollar.

Unlike most other countries, Argentina has an artificially pegged exchange rate which is mandated by the state rather than market demand. This has allowed the widely used parallel currency market to flourish, where pesos are currently trading against the dollar at less than half the official rate.

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

Economists warn that any moves to unwind this highly distorted currency market, while removing artificial strictures which are holding back growth and investment, would likely lead to even higher short-term inflation, rising poverty and social unrest.

“It is clear that the current exchange regime is a hindrance to the economy and has failed both to prevent an acceleration in inflation as well as preserving foreign exchange liquidity,” Ignacio Labaqui, senior analyst at Medley Global Advisors in Buenos Aires said.

The main problem for an incoming government lies in the “inflationary consequences,” in a country where annual price rises are just shy of 116%, Labaqui said.

In 2015, centre-right president Mauricio Macri fulfilled his campaign promise to float the peso currency freely triggering a 28% devaluation. While not immediately devastating, the measures eventually eroded Macri’s support to the point where he was forced to reintroduce controls in 2019.

Bullrich, a former security minister under Macri, is advocating to unify rates and lift currency restrictions “on day one,” according to her economic advisor, Luciano Laspina.

“We need to remove capital controls very fast. The sooner, the better,” Laspina said in a recent forum, betting an abrupt devaluation will bring short-term pain but potentially establish a healthier economy and attract longer-term investment. “With that and the IMF’s support, we can build the conditions to restore some credibility in Argentina.”

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-hardened Argentines. Instead he would close the gap between the official and parallel rate within his first year in office, according to his campaign website.

Milei too is focused on a currency-based solution in the form of a devaluation and establishing one unit of exchange. “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,” economist Diana Mondino and a senior advisor to Milei told Reuters.

But such reforms are unpopular among an already inflation- bruised electorate, which is why the current Peronist administration is sticking to its guns ahead of the October 22 presidential election, pledging to avoid a big devaluation.

It is unlikely that the next administration will remove all these restrictions, “simultaneously,” Labaqui said, even if it is part of their current campaign message. “What is clear is there is consensus within Juntos por el Cambio opposition economists about the need to undertake this task (of devaluing the official rate).”

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