ARS: The only way is down
Argentine officials devalued the Argentine peso (ARS) by close to 20% yesterday, which now means one US dollar buys 350 pesos. At the same time, the local central bank hiked rates by 21% to 118% in an attempt to get on top of inflation which is now running at 115% year-on-year.
The reason for the step-change in the pace of the depreciation in the official USD/ARS rate was politics. Weekend primary elections saw surprising support for libertarian candidate Javier Milei, who has no interest in the ongoing lending plans from the IMF and recommends dollarising the Argentine economy. The peso came under pressure on the back of these results and with no FX reserves to resist this pressure, the central bank was forced to speed up the ARS devaluation.
The result makes the outcome of October's general election highly uncertain and will question Argentina's path ahead with the IMF, where the Washington-based lender is currently reviewing whether to disperse the next $7.5bn tranche of a $44bn four-year programme. Argentina has had a tough year with drought hitting core exports of wheat, corn and soy and it clearly needs some help.
For multi-national corporates, the peso has been incredibly difficult to hedge. The one-year USD/ARS outright forward is already close to 1000 and hyper-inflation accounting means that even if corporates have been able to create local ARS liabilities to offset ARS assets, the ARS depreciation of local entity is still running through quarterly P&L accounts.
The road ahead looks a tough one for the peso.
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