A Balance of Payment Crisis in the Making?

ARGENTINA - Report 30 Sep 2015 by Esteban Fernández Medrano

After the primary elections in August and with less than a month to go for the general presidential election on October 25th, political analysis shifted back to polls, in an attempt to anticipate the awaited outcome. Yet, despite the fact that more than a month passed since the primaries and many relevant political events happened, the results of most polls do not differ much from the primary. So far the presidency will most likely be defined between Scioli and Macri in a ballotage in November. And even though Scioli has an important lead, the final result is not yet written in stone, though the recent payment scandal in the PRO will have to be closely monitored.

Yet, whoever wins the presidential election will face a complex external environment with significant pressures on the FX rate. The annually accumulated Current Account deficit rose in the 2ndQ to USD 8.3bn, the highest annual deficit since 2001.

In an global environment of dollar strengthening, in combination with the related commodity price decline, and an over appreciated official exchange rate, the outlook for an improvement in the current account seems difficult and therefor the scenarios of a calm FX rate in 2016, such as presented in the 2016 Budget proposal, sound excessively optimistic.

Unless the government makes new domestic USD debt placements, its debt payment needs alone from now to yearend, would leave the BCRA with less than USD 2bn of net reserves. Therefore the possibility that the monetary authority starts next year with negative net reserves is not farfetched.

The BCRA is also seen intervening heavily in the local NDF market (ROFEX) to avoid depreciations in the future contracts. The monetary authority has open positions (largely in the February to April contracts) in the order of USD 5bn, with FX rates around 10 to 11 pesos. In the case of a stronger than expected devaluation, such NDF positions would imply additional peso financing needs of the BCRA to cover such FX differences.

Finally, when computing the trade weighted real exchange rate, the official FX rate remains today only 8.5% more depreciated than in December 2001. And such index does not take into account export taxes. Adjusting it by export taxes, to get a sense of FX-related competitiveness for the export sector, shows a TWRER that fluctuates between a value very close to that of December 2001 and up to 30% more appreciated (depending on export taxes which range from 5% to 35%). Needless to say, such FX conditions represent a challenge for the export sector and for any government that wants to avoid a balance of payment crisis.

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