Fitch: Policy Tightening Key in Stabilizing Argentina's Economy
CHICAGO--(BUSINESS WIRE)--Argentina's move to stem a rapid fall in FX reserves by allowing the peso to devalue at a faster pace will not succeed in solving the country's macroeconomic imbalances, according to Fitch Ratings. Isolated policy moves, such as the selective easing of capital controls, merely provide short-term relief. They do little to improve confidence in the government's ability to craft a coherent policy response to currency pressures.
The government's decision to stop defending the peso (it depreciated 13.2% versus the dollar on Jan. 23) was a necessary step to mitigate the decline of FX reserves, which dropped from $30.8 billion on Dec. 30 to an estimated $28.7 billion this week. However, we believe the government's inability to tighten its policy stance could increase the risk of a disorderly economic adjustment and could impair Argentina's sovereign creditworthiness further.
Fitch recently affirmed Argentina's local currency rating at 'B-' with a Negative Outlook. The rating and Outlook reflect our view that highly distortive and unpredictable economic policies are likely to continue. However, continued sharp declines in international reserves could seriously undermine the repayment capacity of the sovereign.
Sustained currency depreciation of the type seen recently could worsen inflation dynamics and complicate the wage negotiation process. This would ultimately increase fiscal pressures. We believe the government's limited financing flexibility is likely to lead to greater monetization of the fiscal deficit, which in turn may worsen the inflation outlook and economic prospects.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.