Argentina: Central bank between excessive nominal revaluations and sudden devaluations - BBVA

According to the Research Department at BBVA, the economy in Argentina will contract in 2016 but will bounce in 2017. They forecast USD/ARS at 15.95 for December 2016 and 17.45 for December 2017.

Key Quotes:

“While Argentina's GDP will fall 1% this year, the change in economic policies is expected to have an impact in 2017, with growth of 3.2% YoY”

“Inflation is falling more slowly than expected but the restrictive monetary policy maintains expectations anchored at 22%.”

“Monetary policy remains restrictive, however, with inflation forecasts around 22% for the next 12 months, making the current real interest rate significantly positive. According to our estimates, the rate will continue to fall until it reaches 25% at year end, in line with the disinflationary trend expected by analysts’ consensus.”

“The Central Bank's policy is usually not to intervene on the exchange market, but it has now begun to make acquisitions on the market directly or via official banks, accumulating USD 2.13 billion in 2Q when cereals and oilseed export payments amounted to USD 7.38 billion from the soy and maize harvest. This flow will almost certainly drop off during the rest of the year as the gradual lowering of interest rates will make Argentina a less compelling location for portfolio investments. In turn, pressure on the currency to revalue will wane, allowing the greater rate to accompany the rise in domestic prices to a greater degree than in the first half of the year.

“We maintain our forecast of $15.95/USD as an average for December 2016 and of $17.45/USD for December 2017. Taking into account the recent release of practically all remaining exchange restrictions from the dollar clamp, coupled with the discouragement of capital inflows declared through the amnesty, which might be construed from statements made by the Chairman of the Central Bank, it may be surmised that the monetary authority will take further steps to try to avoid excessive nominal revaluations of the peso while also averting sudden devaluations. Although he has stressed once again that the peso’s volatility is the main priority, the Central Bank has shown greater readiness to act when the exchange rate moves beyond the $14-16/USD band for an extended period of time.”