The Central Bank of Argentina raised its key interest rate to 60% in an unscheduled meeting on Aug 30 to cope with the foreign exchange situation and risk of greater inflation.
The Argentina economy is on the verge of recession as it shrank 6.7% in June from the same period last year, representing the largest year-over-year decrease since July 2009.
This also marks the third straight month of year-over-year decline, following the contraction of 5.2% in May and 0.6% in April. The first half of the year saw a decline of 0.6% year over year (see all Frontier Markets).
The economic decline is partly attributable to the devastating drought that hit the country in early 2018, hitting the agriculture sector. In June, the agricultural sector fell by 31% from the same month last year. Retail and wholesale commerce fell by 8.4% and manufacturing declined 7.5%. As per the country’s Treasury minister, the economy is expected to contract 1% in 2018 but grow at least 1.5% in 2019.
The Argentina peso depreciated nearly 13% against the dollar on Aug 30. The peso is down more than 108% against the dollar since the start of 2018.
Economists had a view that the peso was overvalued. This was accepted by the government, which sought to depreciate the currency gradually over the coming years. Argentina peso has hit an all-time low to the greenback as the apex bank of the country auctioned $100 million in reserves at an average price of 31.2592 pesos per dollar on Aug 28. In aggregate, $12.78 billion has been sold in the foreign exchange market as the monetary policy makers tried to revive the peso.
This level of depreciation makes the country’s dollar debts more expensive and draws question of how Argentina will be able to meet its $82 billion financing needs for 2018 and 2019.
The job market is under the radar as the Argentine government will cut down on infrastructure spending to curb its budget deficit as per the deal with IMF. Poverty has increased because of inflation and economic downturn as the count of registered workers is falling from its peak last December.
