The peso’s plunge precipitating the emerging markets sell-off is bang in line with its lowest-scoring economic risk indicator, and is a home-grown problem linked to an incoherent economic plan and poor communication.
The sharp sell-off of the peso this week – plunging 15% against the dollar in a single day to reach a new low – had been predicted by experts taking part in Euromoney’s Country Risk Survey.
Far from stabilizing, Argentina’s country risk score has plumbed new depths, pushing the bankrupt sovereign down no fewer than 24 places in the global rankings to 136th in Q4 2013, firmly embedding it in tier five, the lowest ECR category containing the world’s highest-risk sovereigns.
The long-term downward trend in Argentina’s creditworthiness has seen its score for monetary policy/currency stability slip to a paltry 2.8 out of 10, the lowest scoring of the five economic indicators comprising its total risk score. Other political and structural risk indicators have similarly fallen.
One of ECR’s Argentina experts – speaking under the condition of anonymity – noted that while he was still trying to make sense of the market’s reaction, neither US tapering nor China’s growth slowdown provided the trigger for the sell-off, which is fundamentally a home-grown problem linked to dwindling reserves.
The economic problems wrought by the unorthodox policies associated with Argentina’s political dissonance are evident because “there is no comprehensive plan in place to deal with the fiscal deficit financed by the central bank”, he says.
“An eight-peso per dollar floor has been imposed, as the authorities aim to reduce the spread between the official and parallel exchange rates and provide a signal to exporters ramping up imports, but are dissuaded to send shipments abroad until the accelerated depreciation halts.”
However, this and the willingness to raise interest rates are “not enough without also adjusting on the fiscal side”, he says. “If anything, the opposite is occurring, with the recent back-to-work programme for the unemployed, so the fiscal deficit is here to stay.”
And with a falling exchange rate comes higher inflation. “A new consumer price index formulated with the IMF is expected in mid-February, fuelling higher wage demands in both the private and public sectors,” he adds.
“The upshot is no plan and poor market communication,” making Argentina’s debt and import payments tricky in the absence of international financial support after the country’s $100 billion default more than a decade ago.
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