Argentina: Central bank and additional IMF aid should provide support - Danske Bank

The US dollar rose more than 10% today in Argentina after the Central bank rose rates to 60%. Yesterday President Macri called the IMF to accelerate the disbursements.  According to analysts from Danske Bank, the outlook for the peso (ARS) is still uncertain, though central bank action and additional IMF aid should provide support.

Key Quotes: 

“Amid a rapidly collapsing currency, the Argentinian central bank hiked its benchmark rate from 45% to 60% today. The move comes after the currency plunged by almost 20% over the past 24 hours after President Macri called for the IMF to accelerate the disbursements under its standby programme in order to fully finance next year’s budget deficit amid rapidly deteriorating market sentiment.”

“Despite the sizeable hike in the central bank rate, the ARS has continued to weaken. While the slump in the Peso will cause inflation to rise further from its current level of 31%, the central bank rate level will remain high. The failure to regain market confidence is likely to persist in our view until the IMF steps in with additional support.”

“The IMF’s credibility is seriously at stake here in our view. The fact that only two months ago the IMF had to revise and augment the programme is embarrassing. The Argentinian authorities have followed the programme and implemented a traditional cocktail of IMF measures, letting the currency float while tightening fiscal and monetary policies. Naturally, the IMF is pointing to the worsening external environment in Turkey and to some extent Brazil—however, normally buffers should be contained to deal with such a situation. Hence, the revision of the programme and the likely need for additional support are not straightforward and will likely trigger heated discussions among the IMF board, especially with the painful history of the IMF’s role in Argentina in mind.”

“Given the still-unclear situation around the IMF programme, the Peso continues to trade weakly. However, we expect that additional or frontloading of IMF assistance together with today’s sizeable central bank hike should provide support and help stabilise the Peso in the short term and in the longer term lead to a strengthening once confidence returns.”