Argentina sells dollars in parallel FX market

The Central Bank of Argentina (BCRA) on July 15 began selling US dollars in a parallel foreign exchange (FX) market as part of the authorities’ efforts to tackle the country’s persistently high inflation.

Economy minister Luis Caputo announced the measure last week. In a posting on social media, he stated that if the BCRA bought dollars on the official foreign exchange market, the injection of equivalent pesos into the monetary supply would be counteracted through the sale of an equivalent amount of dollars in the blue-chip swap (contado con liquidacion, or CCL) market.

CCL is one of Argentina’s unofficial exchange rates. It is determined by investors buying securities in Argentina and selling them in the US, which creates an implied exchange rate.

The peso’s CCL value closed at 1405 to the dollar on July 12 and jumped to 1291 pesos following the start of the BCRA’s operation, according to Bloomberg. This brings the parallel exchange rate closer to the official rate of 919 pesos to the dollar.

Caputo said the official exchange rate would remain the same and that the central bank’s operation would “deepen” the disinflation process.

Risky operation

Georgina Gómez, an associate professor at Erasmus University Rotterdam, tells Central Banking the intervention is “quite a risky measure” aimed at calming down the FX markets.

She says selling dollars in the parallel market implies there has been an additional, and significant, depletion of the BCRA’s already-scarce reserves.

Gómez adds that the measure will also reduce the speed at which the central bank could buy dollars on the official market, and that the risk premium on Argentine bonds has already gone up because of this operation.

“How sustainable is this? In my opinion, [it can’t go on] for long,” Gómez says.

Arturo Porzecanski, an economist and a research fellow at American University in Washington DC, agrees the central bank’s operation was a “risky move”.

“The BCRA will remove pesos from circulation and make a tidy profit from the arbitrage – but at the expense of missing out on the opportunity to rebuild its international reserves,” he tells Central Banking.

Porzecanski adds that the intervention implies that the official exchange rate is likely to remain grossly overvalued even longer than was previously expected, and foreign bondholders will raise concerns of a sovereign default in 2025. Any attempt by the government to switch from the peso to the dollar – the stated intent of president Javier Milei following his election last December – will also need to be further postponed, he says.

Slowing inflation and IMF support

Annual inflation in Argentina is currently 271.5%. However, monthly inflation has been falling this year, largely due to the austerity measures pursued by Milei.

Gómez notes that the BCRA’s intervention is the latest in a series of measures aimed at curbing inflation, but its impact is “bound to be minimal”. Porzecanski thinks the intervention is likely to result in a further reduction in monthly inflation, though again the impact will only be minimal.

In June, the International Monetary Fund (IMF) acknowledged the government’s progress on disinflation during the eighth review of the $44 billion extended fund facility that Argentina signed with the institution in 2022.

The successful conclusion of the review enabled the IMF to disburse another $800 million to the country to “support the authorities’ efforts to entrench the disinflation process, rebuild fiscal and external buffers and underpin the recovery.”

“Monetary and FX policies need to evolve to continue to entrench the disinflation process and further improve reserve coverage,” the IMF stated.