Monday
October 20, 2014

Moody’s And Econométrica

Tuesday, January 28, 2014

Some predict peso could devaluate 55% in 2014

The peso could reach a trading value of US$9.80 by December 2014, representing a 55-percent annual jump, the local forecasting firm Econométrica predicted yesterday, while US credit-rating agency Moody’s put the figure at 50 percent and predicted inflation would reach 30 percent during 2014.

“The BCRA (Central Bank) showed in January it had no intention of freezing the exchange rate so as to not expose its reserves, just like (it had no intention) of letting rates rise so the parallel (dollar) wouldn’t jump,” Econométrica’s monthly report by economist Ramiro Castiñeira suggested. This consultancy was created by José María Dagnino Pastore, who later became an official of the last military dictatorship.

It estimated that by the end of the year the peso would scratch the US$10-mark with a 55 percent jump in its continual devaluation to close at US$9.80, with Moody’s Investor Service in in a research note to investors putting its devaluation predictions for Argentina closer to 50 percent for 2014.

The Econométrica report took aim at the national administration’s subsidy programme, claiming “the logic of ignoring, for so many years, the deterioration of the electric grid, covering it up with subsidies so reality doesn’t hit consumers’ pockets, took the fiscal surplus as its victim.”

The rapid depreciation has raised credit risks for banks, insurers and companies with foreign debts, analysts from Moody’s Investors Service warned.

“It remains unclear what policies the government plans to pursue to address the underlying causes of capital flight, curb inflation and restore investor confidence,” the ratings agency added in a news statement. “Hence, Argentina’s credit quality will likely continue to face negative pressure.”

Moody’s forecast that price pressures from imports would push inflation upward to over 30 percent in 2014, from what is already one of the world’s highest inflation rates.

Meanwhile, the agency gave its reasoning for devaluation as a result of government inaction in reducing deficit. “The devaluation emerges as a direct consequence of a lack of funding to maintain the overvalued exchange rate,” Castiñeira’s report continued, adding the government’s current objective is to remedy the fiscal and external deficits.

“The devaluation that the government tried to avoid all these years and which in 2014 emerged because of its unaffordability, certainly seeks to liquefy general consumption and public spending, in particular so as to reduce accumulated deficits (fiscal and external), of course at the cost of a recessionary year.”

Moody’s made a similar analysis, suggesting that while devaluation was a normal measure taken by governments to decrease the outflow of reserves, in this case it was “unlikely” pressure on reserves would diminish.

“Although the devaluation may temporarily stem the pressure on foreign currency reserves, it remains unclear what policies the government plans to pursue to address the underlying causes of capital flight, curb inflation and restore investor confidence,” said Moody’s in the news statement yesterday.

Herald staff with Reuters

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