Argentina: No choice but devaluation – Wells Fargo

FXStreet (Córdoba) – According to Eugenio Alemán, Senior Economics at Wells Fargo, the results of the presidential elections mean that many necessary changes are likely to happen in Argentina. The economy will be the biggest challenge. The President-elect Macri promised only one exchange rate system. The economist notes that after years of real appreciation in the value of the Argentine peso a devaluation is the only choice.

Key Quotes:

“Perhaps the biggest issue for Macri is timing, as he has come to power at a time when resources are scarce and the fiscal deficit is already higher than 6 percent of GDP. At the same time, Macri comes at a time when the lack of investment in the country’s infrastructure will hinder its ability to grow faster. On the other hand, the need to reinvest in this infrastructure as well as other economic projects gives his administration an opportunity to sell the country to foreign investors.”

“However, the biggest challenge for investors will be the control of inflation and the ability to repatriate the profits of those investments. Structural reforms made during the 1990s have largely been undone. The incoming administration will start liberalizing the economy but this will have consequences for inflation.”

“Furthermore, the current administration has allowed the currency to appreciate so much in real terms that Macri will have no choice but to allow the currency to suffer a large devaluation to make the country more competitive. However, this will create all of the problems it normally creates in a country that has a history of monetary and fiscal policy mismanagement.”

“As it stands now, Macri will move on his promise of only one exchange rate system. Thus, we should expect a large devaluation during the first months of his administration and then some moderation if he is successful with his plans for the country.”

“His administration needs to put its house in order, know how many liquid reserves the central bank has, fix the statistical reporting process, try to come up with a solution with the holdouts from the debt default and be ready to access the international capital markets so it can build its central bank reserves.”

According to Eugenio Alemán, Senior Economics at Wells Fargo, the results of the presidential elections mean that many necessary changes are likely to happen in Argentina. The economy will be the biggest challenge. The President-elect Macri promised only one exchange rate system. The economist notes that after years of real appreciation in the value of the Argentine peso a devaluation is the only choice.

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