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August 15, 2019

Value of Argentine Peso in Freefall

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The Argentine President, Mauricio Macri, announced early Wednesday morning a series of measures designed to help struggling Argentines shaken by a recession, high inflation and the worst financial crisis since the country defaulted in 2001. The measures included a freezing of fuel prices for 90 days, increased welfare subsidies for the poor, reduced income taxes for workers, and other measures.

As soon as the market opened on Wednesday morning, the Argentine peso quickly devalued another 12% bringing the total devaluation since Monday to 25.6%. The exchange rate is now 61 pesos to the dollar.

The reason behind the most recent financial crisis was Macri's unexpected poor showing in the presidential primary elections held last Sunday. He came in a distant second to the opposition candidate, Alberto Fernandez, and since Macri was the favorite of investors and the financial market, investors decided to pull out their money for fear the opposition would win the presidency in the October elections.

The financial situation in Argentina was already very poor even before the primary elections. Argentina asked for the largest loan ever from the International Monetary Fund (IMF) in order to stabilize the economy. As a condition for the line of credit, the IMF demanded that the country increase its revenues. One of the ways they increased revenues was to impose new taxes on commodity exports, which angered the agricultural sector.

With inflation raging in Argentine, the Argentine farmers will be very reluctant to sell any of their remaining grain production and hold onto the grain as long as possible as a hedge against future inflation. If the opposition wins the presidency in October, there could be a renewed push to further increase taxes on commodity exports. This in turn, could influence the farmer's decision on what crops to plant during the upcoming growing season.

The devalued currency will make it even harder to pay off their loan from the IMF. If the situation continues to worsen, there is a possibility that Argentina could default for the second time in 18 years.