Argentina’s Peso Extends Week-long Rally Amidst Central Bank Concerns

Argentina
A man shows Argentine pesos outside a bank in Buenos Aires' financial district, Argentina August 30, 2018. Picture taken August 30, 2018
(Photo: REUTERS/Marcos Brindicci/File Photo)

Argentina's peso currency has extended its week-long rally on Tuesday with investors and bankers showing concern over peso-based loans offered by the country's central bank which is currently at very high interest rates. Meanwhile, economists were worried about the bank's own growing debts.

In an attempt to stave off Argentine banks from using the US dollar and to encourage the country's financial institutions to invest in peso-denominated assets, the Central Bank of Argentina - Banco Central De La Republica Argentina (BCRA) has begun offering short-term notes called Leliqs which is currently at a neck-high interest rates of around 70 percent, a Reuters report said.

As of this week, the central bank has already sold 60.1 billion pesos or roughly USD$1.6 billion, in Leliqs with an average annual interest rate of 72.6 percent from Monday's 73.5 percent.

According to the news outlet, the American dollar has become one of the biggest factors that have driven inflation in the third biggest economy in Latin America. The currency shows stronger forex rates against the local peso at 37.14 pesos per 1 USD on Tuesday.

This value, as further stipulated, is actually an improvement from last month's rate which has risen to 11.2 percent this October. However, it is still hitting way below 50 percent since the beginning of 2018.

Local financial analysts and market watchers predicted further devaluation of the Argentine peso.

Meanwhile, economists have been quite wary of the high-interest rates tagged by the Leliq notes. As pointed out in this report, the issuance of such notes is a risky move in the part of the BCRA, with fears that it could backfire and further plunge the bank into more debt.

Citing the statement from a local consultancy firm in Argentina, it is said that the strategy could prove to be successful but only if the expected depreciation of the peso over the years would help increase the value of the bank's dollar reserves. To note, for every sale of Leliqs, the bank's liabilities increase. It would be a different story then if the Leliq debt grows faster than the peso depreciation.

If the latter case happens, according to Guido Lorenzo, a representative of the said financial institution, the central bank would end up with high debt obligations.

Swap Deal With China

In a previous Business Times report, it was found out that Argentina is currently working in the renewal of the swap deal it forged with China.

When it will be finalized, the agreement will add USD$9 billion worth of funds to the LatAm country's dwindling reserves.

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