August 13, 2018 / 4:16 PM / 4 months ago

UPDATE 6-Argentina peso pushed to all-time low by graft scandal, Turkey

* Central bank hikes policy rate to 45 percent

* Graft scandal could help Macri get re-elected

* IMF applauds decision to issue less short-term debt

* Government forecasts zero economic growth this year (Adds government full-year 2018 economic growth projection)

By Hugh Bronstein and Walter Bianchi

BUENOS AIRES, Aug 13 (Reuters) - Argentina’s currency fell 2.4 percent to close at a record low 29.97 per U.S. dollar on Monday, pressured by a corruption scandal that could damage the country’s construction sector, while Turkey’s financial crisis unnerved investors in emerging markets globally.

The graft scandal rocked Argentine markets this month when a local newspaper revealed that a chauffeur employed by the previous government said he kept a record of his deliveries of cash from construction companies to government officials from 2005 to 2015. Construction executives have told prosecutors the payments were in exchange for public works contracts.

More than a dozen executives and officials from the administration of former President Cristina Fernandez have been arrested. Fernandez has immunity as a national senator.

But the scandal could hurt her chances of a comeback in next year’s presidential election, and help President Mauricio Macri win a second term. Free markets advocate Macri has spent his first term trying to unwind what he called unsustainable subsidies and heavy currency controls that Fernandez favored.

Cutting subsidies has increased utility bills and fueled inflation of 29.5 percent in the year through June.

Turkey’s lira meanwhile recovered slightly from a record low of 7.24 to the U.S. dollar on Monday, but the crisis kept rattling global markets, given the U.S. dollar debts of Turkish banks and corporations. The lira currency has lost more than 40 percent against the dollar this year.

Argentina’s currency has lost almost as much as Turkey’s, with its peso down 37.8 against the greenback in 2018. The government has cut its full-year 2018 economic growth forecast to zero from 0.5 percent, treasury ministry official Guido Sandleris told reporters on Monday.

“NOTEBOOKGATE”

Local daily newspaper La Nacion last week published contents of notebooks kept by a driver that detail how he transported bribe money from construction companies to government officials from 2005 to 2015.

The sprawling investigation will have a negative impact on the country’s economic growth, an official with the Fitch credit ratings agency said last Thursday.

“The main concern is not the corruption issue per se but rather the risk that the scandal will further slow the rate of growth of the construction sector, one of the few sectors that has proven resilient during Argentina’s economic slow-down,” said Julio Burdman, a Buenos Aires-based pollster.

Fernandez denies wrongdoing and accuses her arch rival Macri of using the justice system to persecute her.

“Cristina is pretty much done, which means that Macri has an increased chance of being reelected,” Burdman said.

Fernandez can count on getting 25 to 30 percent of the vote in a national election, according to Ignacio Labaqui, an analyst for consultancy Medley Global Advisors, but what he called “Notebookgate” may limit Fernandez’s popularity.

“The investigation will negatively affect her ability to improve her image among independent voters,” Labaqui said.

RATE HIKE

The South American country’s Merval stock index was down 3.46 percent on Monday while Argentina’s dollar-denominated sovereign debt spread to comparable U.S. Treasuries widened by 46 basis points on Monday to 746, according to JPMorgan’s EMBI Global Diversified Index.

Argentina’s central bank on Monday said it increased its key interest rate to 45 percent from 40 percent. The bank said it planned to sell $500 million of its reserves on Tuesday, in a bid to stabilize the peso.

The bank also said it will issue less short-term debt. The decision to curb so-called “Lebac” debt issuance, “should remove an important source of vulnerability,” the International Monetary Fund (IMF) said in a statement.

Reducing Lebac sales is consistent with the $50 billion standby agreement the country has with the IMF, the Fund’s chief spokesman Gerry Rice said in a statement. (Reporting by Walter Bianchi and Hugh Bronstein; Additional reporting by Scott Squires and Eliana Raszewski Editing by Jeffrey Benkoe, Clive McKeef and David Gregorio)

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