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The base scenario assumes that the exchange market will stabilise in this quarter in Argentina, according to the Research Department at BBVA. They warn that doubts remains on whether the programme can bring lasting calm.  

Key Quotes:  

“The exchange rate rose by 35% in August (with an accumulated rise for the year until then of 98%), despite the fact that the Central Bank of Argentina sold reserves totalling $5.4 million ($9.2 million since the end of June), with the monetary policy rate rising by 20% and bank swaps up 5% (the latter recording an accumulated increase of 21% for the year). Calm only arrived when there was progress with respect to the new IMF agreement and the CBA’s new policy programme, which consists of maintaining the monetary base and establishing a broad “currency nonintervention zone” in which the peso floats freely, with the Central Bank only intervening beyond this band.”

“This non-intervention zone began at 1/10 in the 34-44 peso/dollar range and is adjusted on a daily basis at a monthly rate of 3% until December, when its width will be assessed along with the band gradient for 2019.”

We expect to see uneven performance between the bands, as the CBA is not restricted in its currency purchasing and can restore reserves if it reaches the lower band, while above the upper band, intervention will be limited.”

“Doubts remain as to whether the programme can bring about lasting currency market calm given the Central Bank’s limited capacity to intervene if volatility returns. In October and December the Treasury will have IMF disbursements available totalling $6.7 million to cover peso expenditure and bolster the supply of currencies.”

Our base scenario assumes that the exchange market will stabilise in this quarter, with the dollar only falling off slightly toward late 2019 which will partly compensate for inflation, meaning that depreciation will continue in real terms, which will help in the recovery of economic activity and the closing of the external deficit. It also supposes that inflation will gradually fall from October to 29% in December 2019, that the government’s fiscal targets will be met, guaranteeing the flow of IMF funds and the recovery of confidence in the country. The gradual return of private equity will mean that the recession will be hard but short, lasting only three quarters from 2Q18 to 4Q18, with the economy turning around in 2019. Nevertheless, all the uncertainty mentioned above, which leads economists to be cautious when making decisions, means there is a panorama for the coming year with more questions than answers.”