“There Are No More Dollars In The Central Bank”: Argentina’s New President Confronts Liquidity Crisis
On Monday, Mauricio Macri, the son of Italian-born construction tycoon Francesco Macri, beat out Cristina Kirchner’s handpicked successor Daniel Scioli for Argentina’s presidency in what amounted to a referendum on 12 years of Peronist rule.
A legacy of defaults combined with exceptionally high inflation and slow growth finally tipped the scales on the Leftists and now, Macri will try to clean up the mess.
As Citi noted in the wake of Macri’s victory (which was accompanied by some very bad dancing), “the most urgent challenge on the economic front is FX policy.” The President-elect wants to unify the official and parallel exchange rates (~9.60 and 15.50 ARS/USD, respectively) and that will of course entail a substantial devaluation. Just how overvalued is the peso, you ask? “Grossly” so, Citi says. Here’s their take:
Regarding the real overvaluation of the ARS, we estimate that real effective exchange rate has dropped (appreciated) 44% since 2011. Thus, for Argentina to have the same REER than four years ago, the USDARS should stand at 17. A different approach would be to compare the evolution of the real exchange rate vis-à-vis the USD in Argentina and other countries in the region. While the LatAm currencies (BRL, CLP, COP, MXN, PEN and UYU) real exchange rates relative to the USD have increased on average 36% since 2011, the USDARS has dropped 19% in real terms. Thus, from this point of view, the USDARS should stand 68% higher at 16.1.
A key figure in the execution of Macri’s currency plan is former JP Morgan global head of FX research Alfonso Prat-Gay who will be Argentina’s finance minister under the new Presdent. Prat-Gay was president of the country’s central bank beginning in 2002 and, as Reuters reminds us, “won widespread acclaim for swiftly taming runaway inflation and championing central bank independence.” If that sounds to you like characteristics that might rub a Peronist the wrong way, you’d be right, and Prat-Gay was ousted by the Kirchners.
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