Dollar decline in Argentina is not sustainable due to higher country risk and loss of reserves, specialists warn

The stock market dollar and the cash dollar with liquidation went down again on Wednesday in Argentina due to the sale of peso bonds that made the price fall more than the dollar bonds for the third consecutive day. Although economists and market analysts weigh the change in strategy adopted by Finance Minister Martín Guzmán and the decrease in the emission, they do not believe that the decline can be sustained.

Today, for instance, the AL30 bond in pesos fell 6% to $5,640 and in dollars it fell 1.3% to USD 38.72 per sheet. As a result, the cash dollar with liquidation fell 6.3% to below $152.30 and the dollar exchange (or MEP) closed at $144.85 with a fall of 5.3%. Country risk jumped to 1,481 basis points, its highest value since the closing of the exchange. In these 48 days, country risk has already risen 34%.

Meanwhile, the official dollar was held at $78.31 again by Central Bank sales forces, which today lost some USD 50 million in reserves according to exchange market estimates.

According to official information, in the fifteen exchange rounds that took place in the month up to 22 October (last available data), Central Bank President Pesce disbursed USD 661 million to sustain the exchange rate.This is half of what he had been losing at that point in the previous month -which led to the currency market super blockade that blew the exchange rate gap-, but the downward trend persists. Just like that, this Wednesday the gross reserves fell below the USD 400 million mark.

Just like that, this Wednesday the gross reserves fell below the USD 400 million mark.

"They managed to decrease some of the exchange rate pressure by changing quite considerably what they had been doing, returning money to the Central Bank after a placement by the Treasury. Now, there are limits to this [strategy]. I believe that this measure of indebtedness alone will not be enough to dry up the peso market. On the other hand, they do it with dollar instruments, something that makes the exchange rate dynamics more risky and increases the risk of a default, once again. Then, while the peso faucet is still open because of the fiscal deficit, it is difficult to expect a change in the situation," considered economist Gabriel Zelpo.

For the time being, the blue dollar --or black market dollar-- showed a more modest decline and closed at $178 pesos with a drop in demand due to being the end of the month.

Precisely because Pesce does not stop issuing on the one hand and losing reserves on the other -which fuels the expectations of a devaluation-, in the market they do not see that the drop in prices as sustainable. Furthermore, since the containment of parallel exchange rates is being done at the cost of ruining the parity of the bonds, they warn of more problems for future financing.

"The underlying problem, which is the deficit and the lack of leadership, did not change. The market is currently in chaos, in addition to the collapse of the German stock market, the fall of the shares in the United States, and the market cannot find a way to point the finger. In the middle of it, the Argentine government is trying to dry up the market, by putting pressure on the banks and stock brokers to stop the demand for cash with liquidation. And all this generates disorientation and higher country risk. If this continues, the current precarious support for the bonds could be lost and they could calmly fall to USD 32. The losses of the parallel dollar are like two buckets of water in a fire, and unless the leadership unifies and allows the market to recover, we will see parities that will seriously damage the Argentine bond market," said market analyst Francisco Uriburu.

The interest rate could be a stumbling block even for the placement of dollar debt that Guzman has a scheduled for November 9 and 10, according to economists consulted by LPO. For Zelpo, the placement of debt in dollars will be "very difficult". "It is not only the fact of the 1500 basis points of country risk and the difficult situation, but placing debt after a restructuring takes time. Approximately one year in the best scenario, taking into account similar restructures to ours".

Meanwhile, for Uriburu: "The rate is not so much a problem, what we have to see is if these funds that were trapped in peso instruments with the stocks want to get into Argentine dollar bonds that are less and less valued and increase their exposure to an investment that has only been giving them losses for years".