Analysis: Argentine Peso Worst Emerging Market Currency for Sixth Consecutive Year

RIO DE JANEIRO, BRAZIL – Some things never change. The Argentine peso is set to close 2020 as the worst-performing currency among emerging markets for the sixth year in a row.

Or, to put it in perspective, this would be the eighth year of the last nine amid persistently high inflation.

This is the result of a decade of policy twists and turns that have left the once-rich economy in ruins. Moreover, there is no end in sight for the fall of the Argentine peso in the spot market, even as the scenario for emerging markets improves next year. Many analysts expect authorities to accelerate the controlled daily devaluation as international reserves have reached their lowest level in four years.

“The question is how long Argentina will continue to use reserves to delay the adjustment,” said Sergi Lanau, deputy chief economist at the Institute of International Finance.

A spokesperson for the central bank did not want to comment on the bank’s performance or policy plans for 2021.

The official peso has dropped 27.2%, to 82 pesos per dollar since last December, and will lose about 30 percent each year if the Central Bank maintains its policy of allowing for depreciation of 0.1 percent to 0.2 percent per day. This is comparable to the 24.3% drop of the Turkish lira and 20.7% of the Brazilian real this year.

Parallel market

The peso’s performance is even worse in the parallel market. A dollar is worth about 150 pesos in clandestine currency exchange houses, called “caves” in Buenos Aires, or about 145 per dollar through a number of financial transactions known as blue-chip swaps. This blue-chip rate fell 47% this year.

The peso’s decade of decline has followed right- and left-wing governments. It all started under President Cristina Kirchner, who tried to limit the decline by imposing exchange controls, and continued with her successor Mauricio Macri, who removed those same controls to restore investor confidence. In the final weeks of his administration, Macri was forced to reverse the decision and reinstate limits, a process that has intensified under current President Alberto Fernández.

Economy Minister Martín Guzmán said on December 3rd that these controls had helped to slow down the depletion of international reserves, which have been steadily decreasing this year. However, the outlook for next year is worse than in 2020.

Analysts expect annual inflation to accelerate to 50% in 2021, which would worsen the country’s loss of competitiveness. Still, the government said it will not seek a rapid and one-off devaluation despite market expectations that this will have to happen next year.

“The government may try to hold out until the mid-October elections, fearing a predictable major shift to inflation,” said Eduardo Levy-Yeyati, an economist and founder of Argentina’s Elypsis consulting firm. “But the measure is counterproductive, because it feeds exchange rate speculation at the expense of investment.”