The value of Argentina’s peso dropped more than 13 per cent on Thursday alone, after plunging seven percent on Wednesday.
The central bank of Argentina made a deal with the International Monetary Fund (IMF) yesterday to raise interest rates from 45 per cent to 60 percent.
The central bank asked for the early release of a $50 billion loan from the IMF, which was agreed in June.
However, the interest rate increase did not seem to have helped stabilise the peso, as it continued to plummet.
Argentine President Mauricio Macri said during a televised speech on Wednesday: “I know that these tumultuous situations generate anxiety among many of you … I understand this, and I want you to know I am making all decisions necessary to protect you.”
Will it continue to fall?
Investors are increasingly concerned Buenos Aires could face more setbacks soon as it struggles to repay heavy government borrowing.
They were particularly worried after Macri admitted there was a “lack of confidence in the markets” about Argentina’s ability to pay its $24.9 billion peso- and foreign currency –
denominated debt payments next year.
Argentina is expected to enter a recession in the third quarter after borrowing costs, government spending cuts and an agricultural drought have resulted in the peso becoming the
world’s worst-performing currency this year.
A number of emerging market countries, including Argentina, Turkey and Brazil, are also struggling as the U.S. Federal Reserve has implemented tighter monetary policy to boost the
dollar.
The Turkish Lira crisis in Turkey has put pressure on other currencies around the world, including the Indian Rupee.
The lira has dropped around 40 percent against the greenback since the start of 2018.
Many people in Argentina blame the IMF for encouraging fiscal policies that made the country’s worst economic crisis in 2001 worse.
This resulted in millions of middle-class citizens falling into poverty as the country was unable to recover.
Paul Greer, a portfolio manager at the Fidelity Emerging Market Debt Fund, said: “It looks likely that the economy is heading for a hard landing recession over the next 12 months.”
The IMF responded it was only considering feeding up payments due to the financial melt down, and expected Argentina to start implementing stronger fiscal and monetary policies in
the meantime.
The bank has already sold more than $13.5 billion this year in a bid to help the currency and this has left it with $54.3 billion in foreign currency reserves.
Argentina has already agreed with the IMF to cut its fiscal deficit from 3.7 percent of gross domestic product last year to 2.7 percent in 2018 and 1.3 percent in 2019.