Argentine markets split after currency controls stoke uncertainty

A man shows Argentine pesos outside a bank in Buenos Aires’ financial district, Argentina August 30, 2018. — Reuters pic
A man shows Argentine pesos outside a bank in Buenos Aires’ financial district, Argentina August 30, 2018. — Reuters pic

BUENOS AIRES, Sept 2 — Argentina’s international dollar and euro-denominated bonds fell to record lows today and the official peso diverged from the black market after President Mauricio Macri imposed capital controls yesterday as the country’s debt crisis spirals.

The stock market opened more than 1 per cent higher.

The about-face by Macri, who had previously reversed many protectionist practices of his predecessor, Cristina Fernandez de Kirchner, came after the government failed to stem heavy investment outflows and to shore up its tumbling currency.

With official access to dollars curtailed by the government’s recently-announced controls, businesses and individuals turned to the black market to get access to foreign currency. Dollar demand rises at time of financial uncertainty.

While the new measures bolstered the official currency 0.42 per cent to 59 per dollar, the black market peso weakened 1.56 per cent to an all-time low 64 to the greenback traders said.

The official peso had lost 23.8 per cent of its value since the Aug. 11 primary election turned the country’s politics on its head, with business-friendly President Mauricio Macri getting soundly thrashed by his populist-leaning opponent Alberto Fernandez.

Fernandez is now the clear front-runner ahead of the Oct. 27 general election. His vice presidential running mate is previous president Kirchner, a free-spending populist who applied heavy-handed trade and currency controls during her two terms.

“The problem with restrictive, emergency measures is that they are easier to apply than to retract,” said Buenos Aires-based financial analyst Christian Buteler in a tweet.

More peso weakness was expected ahead. “The game has changed for the foreign exchange market,” said Sabrina Corujo, an analyst with Buenos Aires brokerage Portfolio Personal, warning that local stocks and bonds were set to weaken as well.

The central bank has been authorized to restrict purchases of dollars as it burns through its reserves to prop up the peso. Investors fretted that once the controls are in place, they will be difficult to end, possibly leaving Argentina with an economy once again distorted by government intervention.

The reintroduction of controls was a sharp turnaround for Macri, a free-trade advocate who won the presidency in 2015 on promises of “normalising” Latin America’s No. 3 economy by ditching the controls favoured by the previous administration.

Argentina’s benchmark international 2028 dollar bonds dropped more than 2 cents to a new low of 36.5 cents, according to Refinitiv data. Bonds maturing in 2038 recorded similar losses.

Argentina’s euro-denominated sovereign bonds also suffered hefty losses to hit record lows today. The 2022 bond dropped more than 10 cents to 34.45 cents while the 2027 issue tumbled 7.2 cents to 33.501 cents, according to Refinitiv data.

American depository receipts (ADRs) of Argentina’s financial institutions also came under pressure. Grupo Financiero Galicia’s Frankfurt-listing tumbled 9.15 per cent while Banco Macro SA fell 6.5 per cent.

Today was an official holiday in the United States, which could help control losses in Argentine asset prices by reducing trading volumes, Buteler tweeted.

The risk premiums demanded by investors to hold Argentina’s dollar bonds over safe-haven US Treasuries rocketed to 2,534 basis points on J.P. Morgan’s index of hard-currency emerging market bonds – levels last seen in the wake of a major 2001 default.

“(Capital controls are) a sign of distress in the market and reflect that the new parameters on Argentina are weak and when the peso weakens further it weighs on the credit profile,” said Michael Bolliger, head of asset allocation for emerging markets at UBS Wealth Management.

“There remains a lot of pressure on the currency ... There’s a limit to what they can do without capital controls.”

The peso has lost more than a third of its value year-to-date, following a more than 50 per cent drop last year. The central bank has burned through nearly US$1 billion in reserves since Wednesday but failed to stem the peso’s slide.

“The key is to watch how the local market reacts today,” said Graham Stock at BlueBay Asset Management. “Will it reassure locals that their dollar deposits are safe or will it lead to attempts to get around the controls?” — Reuters

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