World Bulletin / News Desk
Argentina’s peso will likely continue to trade at record lows on the black market this month on higher demand for dollars to finance foreign vacations and protect savings against 27% annual inflation.
The peso dropped 5.8% to 10.9 per dollar on Tuesday from 10.3 the previous day, and has hovered at these lows since then, according to Argentine daily La Nacion.
“The dollar is a traditional refuge for savings in Argentina,” said Gustavo Quintana, a currency trader at Buenos Aires brokerage Rabello y Cia. “There is a lot of demand for dollars because people need them to travel. And there is an excess of pesos from year-end salary bonuses.”
People are rushing out to buy dollars as consumer prices rise and the peso weakens, reducing spending and savings power.
Consumer prices rose by an estimated 26.8% in November 2013 on the year, according to private estimates compiled by opposition legislators.
Inflation could accelerate beyond 30% this year even as the government controls the prices of 100 staple goods.
At the same time, the government has quickened the pace of currency devaluation on the official market to 34% a year from 20-25% in 2013.
The scenario has prompted financial consultants to recommend buying dollars, property and household appliances instead of holding pesos, and to pay off credit cards and other bills on the first due date.
Yet buying dollars on the official market is all but impossible. The government is trying to hold on to as many greenbacks as possible to meet its own needs: paying the national debt and imports. Argentina can’t readily sell bonds on global markets to ease a reliance on central bank reserves because it has yet to fully settle a $100 billion default from 2001.
Without access to the official market, where the peso was trading at 6.65 per dollar on Friday, or about 60% more than on the illegal market, people have had to turn to the black market.
Indeed, local reports say the number of illegal traders has surged on a main pedestrian street in downtown Buenos Aires. Business is brisk in the back rooms of trading houses.
The government came out this week to downplay any concerns about the parallel trading.
The black market “is absolutely illegal and marginal,” said Jorge Capitanich, the presidential chief of staff. “It is not a variable that is indicative of the rest of the macroeconomic variables.”
Economy Minister Axel Kicillof said he doesn’t follow the black market rate, but looks at the trade surplus, debt maturities and the state of exports to monitor the health of the economy.
Even so, the government has started to take steps aimed at reducing demand for dollars. The central bank has ramped up the sale of dollars, cutting its reserves to $30.2 billion from $30.8 billion at the end of 2013.
The social welfare agency, known as ANSES, also sold dollar-denominated government bonds on secondary markets to boost dollar supplies.
No matter, the demand for dollars likely will remain strong through the vacation season.
Buying government bonds to safeguard savings against inflation and currency depreciation isn’t easy for retail investors, as they must have their taxes up to date and meet certain conditions, Quintana said.
“Not everybody can access these bonds,” he said.
This leaves the black market and the government’s continued challenge to contain capital flight and protect central bank reserves as a main source of funds for paying the national debt.
Kicillof recently created a committee to follow the exchange rate, led by Central Bank President Juan Carlos Fabrega, Infobae newspaper reported Friday.
The strategy is focused on boosting reserves and reducing demand for dollars, a tall task given that inflation is spurring demand for greenbacks and reserves have tumbled. The central bank’s reserves have dropped 43% from a high of nearly $53 billion in 2011, hitting their lowest level since 2006.