March 11, 2014
Devaluation spurs 30% rise in prices
Some retailers close their doors to wait for price guidance from suppliersA sign in the window of Quintex, a hardware store in the Wilde neighbourhood, shows the effect of the peso’s biggest devaluation since 2002.
“Out of respect for our clients, this store will remain closed until our providers set their prices,” it read.
Other shopkeepers chose not to wait to see the results of last week’s 15 percent depreciation, raising prices as much as 30 percent on appliances, electronics, wine and other goods that aren’t regulated by the government, while supermarkets seemed to abide by food-price accords reached earlier this month.
“The first reaction has been a paralyzation of almost all the markets for goods and services tied to the official exchange rate," Domingo Cavallo, who as economy minister in 1991 linked the peso to the dollar at one-to-one, said. “No one wants to sell merchandise at a price if they don’t know what the rate will be tomorrow.”
Twelve-month non-deliverable peso forwards plunged 10 percent last week to 12 per dollar, signaling the currency will weaken 33 percent over the next year. The extra yield, or spread, investors demand to hold the nation’s dollar-denominated bonds instead of Treasuries jumped 1.02 percentage point to 10.43 percentage points, the highest since September.
The government is monitoring prices in the wake of the devaluation, Cabinet Chief Jorge Capitanich said over the weekend.
Consumer prices had risen three percent in January before the devaluation, and inflation will quicken to more than 30 percent this year, according to Lorenzo Sigaut, the head economist at the Ecolatina research company in Buenos Aires.
“This surprised us all and creates serious uncertainty since you don’t know where the exchange rate is going,” Sigaut said in a telephone interview. “This is a government that continues to deny inflationary problems but now has to win the battle of expectations.”
The government is seeking to restore investor confidence by paring back some of its control of the economy, reducing support for the peso and easing some currency controls after international reserves used to pay bondholders fell to a seven-year low.
The peso’s plunge forms part of an emerging-market currency rout last week that was triggered in part by a deepening of the political and financial crises in Turkey and Ukraine. The lira sank 4.4 percent in the week, Russia’s ruble dropped 2.9 percent and South Africa’s rand weakened beyond 11 per dollar for the first time since 2008.
In Brazil, the real slumped 2.3 percent to a five-month low on concern that the peso devaluation will erode demand for the country’s goods. Argentina was Brazil’s third-biggest export market in 2013. Neighbouring Chile and Uruguay could also be hurt, Schroder Investment Management said in a note to clients.
Retailers “always find a good reason to raise prices; a change in the exchange rate, it’s humid outside, any excuse,” Kicillof said on public TV Sunday. “They lie and steal.”
Electronic goods store owner Roberto Campos, 46, raised prices 20 percent last week following the peso’s decline.
Sales at Campos’ store rose about 10 percent in the wake of the devaluation as people bought before prices rose, he said. Business will probably slow in the medium-term as the government continues to let the peso slide, he said.
“This is just the beginning,” he said while staring at a computer that was updating prices on his goods to reflect the new exchange rate. “Last year there was lots of uncertainty, now the uncertainty is a reality.”
At a store owned by Chilean retailer SACI Falabella in downtown Buenos Aires, the price of a Whirlpool 80X1 model refrigerator on January 24 had risen 30 percent to 27,499 pesos from 21,199 pesos two days earlier.
“The fridge is assembled in Argentina, but all the components are imported,” Andre Viera, a salesman at the outlet on Florida Street, said in an interview. “The lady who came in on Wednesday and said she would be back to buy it on Saturday must be suicidal.”