Argentina: what to watch this week

December 14, 2015

Argentina's President Mauricio Macri ties his necktie at his home before going to his swearing-in ceremoy in Buenos Aires, December 10, 2015. Macri took office as Argentina's first non-Peronist president in more than a decade on Thursday, promising to end policies of leftist populism and revive the South American country's ailing economy. Macri began his 4-year term in a ceremony snubbed by his predecessor, Cristina Fernandez de Kirchner, following a rancorous argument over where the handover of power should take place. REUTERS/Argentine Presidency/Handout via ReutersATTENTION EDITORS - THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. IT IS DISTRIBUTED, EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS. FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS. - RTX1Y619

Argentina’s newly-elected liberal government is working around the clock to overhaul the country’s foreign exchange system. The administration has little margin for error but a positive view about Argentina’s outlook still prevails.

Here are some issues to watch this week and looking into 2016:

* Central bank running low on reserves. What is left of the depleted international reserve stock is draining quickly, despite official controls. There is only about $25 billion left in the central bank’s reserves, and much of that is invested in illiquid assets. The sorry state of the central bank’s balance sheet is in part due to years of deficit monetization under former President Cristina Fernandez.

* Devaluation in the offing. A key reason behind the current bleed of dollars is a crawling peg scheme fixing the peso at a strong rate close to 10 per U.S. unit. President Mauricio Macri, who was sworn in last week, is widely expected to float the local currency soon.

* In search of recapitalization. To avert a speculative attack following the currency devaluation, incoming Finance Minister Alfonso Prat-Gay is seeking to prop up the central bank’s position through special financing arrangements with global banks and grains exporters, Reuters reported. Argentina could tap more than $10 billion right at the start.

* Meeting holdouts. Argentina’s deal with the banks, however, requires a good amount of legal small print work to circumvent potential seizure from bondholders holding $10 billion in judgments against the country. Macri’s team will formally introduce itself to the New York court in charge of the case this week.

* Inflation spike. Expectations of an imminent devaluation have resulted in constant price mark-up at stores. The weekly inflation rate picked up to 1.2 percent in early December, the highest since the last devaluation at the start of 2014, according to Elypsis, a local research firm.

* Tough year ahead. The prospect of record growth in consumer prices in 2016 adds to a stagnant economy to paint a bleak picture. This is compounded by a host of much anticipated problems, such as the specter of power blackouts due to years of lack of investment in the sector.

* High hopes. Local markets are pricing in that Macri will succeed in switching to a business-oriented model. Many middle-class Argentines are optimistic too: “We are all tuned in to see if he is able to create a predictable economic environment”, said Daniel Folatelli, a senior programmer at IBM in Buenos Aires.

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