BUENOS AIRES, Dec 17 (Reuters) - Argentina’s peso was expected to weaken by about 30 percent when markets open on Thursday after the country’s new government announced a slew of free-market reforms, including the floating of the currency.
The changes outlined on Wednesday by Finance Minister Alfonso Prat-Gay ditched the controls that the previous administration had put on the currency. But average Argentines could feel the brunt of higher inflation before the new policies achieve their goal of revitalizing the economy.
The announcements pave the way for a devaluation of the official peso exchange rate, which will float within a moving band. The opposition, loyal to Cristina Fernandez, who left the presidency last week, warned the devaluation would dilute wages.
Indeed, the government will have to convince union leaders that a lower dollar salary might not mean a lower real salary. Unions were already ready to demand raises in line with inflation that is estimated at above 20 percent.
Wall Street generally agreed that Prat-Gay’s reforms were needed to reduce distortions in the economy after years of the central bank’s strict control of the exchange rate.
“The benefits, however, may not materialize until well into next year,” Capital Economics said in a note to clients.
Prat-Gay said the exchange rate could be “close to” 14.2 pesos to the dollar, meaning a devaluation of about 30 percent. “Our sense is that the authorities will allow the currency to fall to around this level quickly,” Capital Economics said.
Starting on Thursday, Argentines will have full access to U.S. dollars, regardless the motive of the transaction. It is a return to the same policy that prevailed before Fernandez implemented capital controls in 2011.
Considering the pent-up demand for greenbacks, economists said the exchange rate might overshoot the expected range.
Fernandez imposed protectionist measures, including heavy trade and currency controls, as part of her efforts to cut foreign indebtedness, strengthen the social safety net and bolster local industry. She left the nation with double-digit inflation, a yawning fiscal deficit and thin dollar reserves.
Mauricio Macri, a proponent of free markets and former mayor of Buenos Aires, won the presidency last month against a candidate from Fernandez’s party. He promised that the devaluation will help jumpstart the economy by spurring exports. (Reporting by Hugh Bronstein; Editing by Lisa Von Ahn)