Newly elected president Mauricio Macri makes what economists say is bold move in order to increase exports and spur economic growth

This article is more than 4 years old

This article is more than 4 years old

Argentina is to lift its currency controls and said it would allow the peso to float when markets open Thursday, setting the stage for a sharp devaluation.

The move follows promises by President Mauricio Macri to implement reforms in order to increase exports and spur economic growth.



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Macri, a free-market advocate who took office last week, has vowed to regain investor trust in Argentina, shattered by its 2002 record default, a lack of trustworthy official economic data and heavy state intervention.

Argentina’s previous leader, Cristina Fernández de Kirchner, used central bank reserves to prop up the peso.

By lifting controls, Macri also hopes to spark a wave of investment in an economy that is battling low foreign reserves and double-digit inflation.

“He who wants to import will be able to do so, and he who wants to buy dollars will be able to buy them,” said the finance minister, Alfonso Prat-Gay, adding that this government intended to normalise the economy, after eight years of interventionism under Fernández.

Farmers in Argentina, a grains-exporting powerhouse, have been waiting for the peso to weaken before selling stockpiles of soybeans. Manufacturers have argued for controls to be lifted so they can import crucial parts for production.

Asked what he expected the exchange rate to be now, Prat-Gay said there was “no magic number”.

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However, the most realistic level at the moment was the blue-chip swap rate, used to buy Argentinian assets traded abroad. That rate is currently around 14.2 pesos per dollar, compared with the official exchange rate of 9.8275, implying a devaluation of around 30%.

“Let’s see what happens tomorrow. The policy will be what economists call a ‘dirty float’,” Prat-Gay said. “There will be fluctuations in the exchange rate but there will also be a central bank with the necessary tools to buy if the currency weakens too much or sell if it strengthens too much.”

Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management in New York, said it was positive to see the new government immediately tackling the currency issue.

“The exchange rate was very important because it will eliminate all the distortions that were in the market,” he said.

Mariscal said there was a chance the peso could weaken more than 30% at the start, “but there is also a significant chance that it comes back rather quickly”.

“There is a lot of Argentine money outside waiting to come back once the new team builds some credibility,” he said.

However, many Argentinians fear the devaluation will lead to another spike in prices, with inflation already running at around 25%, according to private estimates.

In order to ensure there are enough dollars to go around, Argentina was securing various sources of financing and expected inflows of $15bn to $25bn over the coming month, Prat-Gay told reporters.



He expected the central bank to reach a deal with foreign banks within 10 days for a credit line worth more than $5bn. Last week, a banking source told Reuters that Argentina was in talks over a loan with HSBC, JPMorgan Chase & Co, Goldman Sachs, Deutsche Bank and Citigroup Inc.

The South American country has been restricted from accessing international capital markets for years by a long-running legal battle with creditors over unpaid debt that Macri has promised to settle later in tough negotiations.

A deal with banks now would give the country a better negotiating hand at talks with the litigating creditors.

Prat-Gay said on Wednesday that Argentina would also convert a large stock of Chinese yuan from its currency swap with China into dollars in the next few hours.

It has also sealed a deal with grains exporters to liquidate $400m of produce per day over the next few weeks, he said.

Alejo Costa, chief strategist at local investment bank Puente, said the new government’s policy move was bold and had good chances of succeeding. He said he expected an initial exchange rate of 14-14.5 pesos per dollar.

“He sent the correct message, that they have the strength to defend the currency at certain levels, and conveyed the confidence needed to anchor expectations,” Costa said.