Argentine peso plummets nearly 30 percent after controls lifted

BUENOS AIRES - Argentina's peso plunged 29.8 percent at the start of trade on Thursday, in line with expectations, after the country's new government floated the currency as part of a slew of free-market reforms aimed at revitalizing the stagnant economy.

 

It was the biggest one-day devaluation in decades and initial currency market action was heavy and volatile.

 

The big winners were farmers in the vast Pampas grains belt who will start getting paid in stronger U.S. export dollars while average consumers risk seeing their purchasing power fall.

 

Argentines got set to buy dollars denied to them since 2011, when the previous government clamped down on access to the greenback as a way of protecting central bank reserves.

 

The peso opened at 14.00 per U.S. dollar. Less than 24 hours before, Finance Minister Alfonso Prat-Gay predicted the currency would get to about 14.2 per dollar once the currency controls were lifted. The 29.8 percent fall was almost bang on market expectations of a 30-percent devaluation.

 

Mauricio Macri was elected president last month after promising free-market solutions to Argentina's long list of economic woes. Thursday was the first test of his policies. His predecessor, two-term President Cristina Fernandez, believed in heavy state control of the economy.

 

"This is part and parcel of the much-needed reality check that Argentina is getting with its new president," said Charlie Robertson, global chief economist at Renaissance Capital.

 

"Large devaluations tend to be pretty disruptive and negative for gross domestic product in the short-term, but much more helpful in the long-term," Robertson added.

 

Indeed, Argentines could get hit by higher inflation before Macri's policies achieve their goal of revitalizing the economy. The opposition, loyal to Fernandez, warned the devaluation would dilute wages. Unions were already set to demand raises in line with inflation expectations of about 30 percent next year.

 

The price of many goods in Argentina are set according to the peso's value against the dollar. Supermarket prices shot up in early December in anticipation of the devaluation.

 

FARMERS WIN

 

The central bank is scrambling for the reserves it will need to keep up with dollar demand. To help, the government has sealed a deal with grains exporters to liquidate $400 million of produce per day over the next few weeks.

 

"Growers were sitting on close to 13 million tonnes of soybeans, waiting for this devaluation," said Ernesto Ambrosetti, chief economist at the SRA (Argentine Rural Society), which represents the country's biggest farms.

 

"We expect those 13 million tonnes to be sold between now and the next harvest in April and May," Ambrosetti said.

 

Local and foreign investors might also be inspired to bring money back to the country if Macri's reforms succeed.

 

"Exports of agricultural products will help bring in U.S. dollar inflows but the key will be the return of flight capital and foreign investment," said Gary Kleiman, of Kleiman International Consultants in Washington.

 

In a return to policies that prevailed before Fernandez implemented capital controls in 2011, Argentines now have full access to U.S. dollars.

 

Fernandez imposed protectionist measures as part of her program of strengthening the social safety net and helping local industry. She left the nation with double-digit inflation, a yawning fiscal deficit and thin dollar reserves.

 

The local stock index opened 1.67 percent higher and Wall Street generally agreed Macri's reforms would reduce distortions in the economy.

 

"The benefits, however, may not materialize until well into next year," Capital Economics said in a note to clients.  — Reuters