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Currency strengthens further amid export boon and heightened investor
appetite
In June, the currency resumed its strengthening trend observed throughout
most of this year, appreciating 3.1% in nominal terms versus the US$ to
reach 2.79 pesos to the US$. The June appreciation came despite Central
Bank intervention, as investor appetite for emerging market assets remains
strong and healthy export growth continues to provide for a rising inflow
of foreign currency. The government is eager to maintain a competitive
exchange rate and has decided to provide access to foreign currency for
private sector debt payments – previously debtors were only granted
foreign exchange for payments in arrears. Furthermore, on 25 June, the
Kirchner government announced that it intends to impose barriers to
short-term capital inflows. The move is intended to stabilize the currency
and protect the economy from speculative capital. According to the
government decree, which was signed by the president on 27 June, foreign
capital that is not specifically trade-related will require registration
upon entry and be restricted from exiting the country for 180 days.
Despite the current appreciation of the exchange rate and government
measures to stem currency volatility, participants do not expect the
current strengthening trend to persist and anticipate the peso to weaken
again.
Strengthening currency and utility rate controls stem inflationary
pressures
In June, consumer prices dropped 0.1%. The June figure lowered the annual
inflation rate further to 10.2% from 14.3% in May. The June result
confirmed the trend of rapidly diminishing inflationary pressures observed
since the beginning of the year. Wholesale prices declined at a more
pronounced 0.2%, which almost halved the annual rate to 7.9% in June from
17.4% in the previous month. The combination of depressed domestic demand,
along with appreciation in the currency and continued delays in the
implementation of public service tariff hikes are helping to subdue
inflationary pressures. In fact, Consensus Forecast participants expect
annual inflation to decelerate further this year, from the 41.0% pace
observed last year.
Current
account surplus widens amid favourable export environment
The current account balance registered a US$ 1.9 billion surplus in the
first quarter, equivalent to 8.0% of GDP. The first quarter figure was
below market expectations, which had seen the surplus at US$ 2.1 billion.
Moreover, the surplus actually narrowed over the fourth quarter last year,
when the current account surplus had reached US$ 2.5 billion but remained
above the US$ 1.4 billion surplus observed in the same quarter last year.
The improvement over last year’s figure was due mainly to a higher trade
surplus, which rose from US$ 3.8 billion to US$ 4.1 billion. The boost to
the trade surplus reflected continued strong export growth (+12.4%
year-on-year). The capital account deficit narrowed notably from US$ 2.9
billion for the same quarter last year to US$ 1.5 billion. Consensus
participants expect the current account surplus to narrow this year, below
last year’s US$ 9.6 billion figure, as the export engine is anticipated to
benefit from the more competitive exchange rate, while imports expand
gradually along with the pick-up in domestic demand.
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