BUENOS AIRES:Argentina's peso ended a tumultuous week Friday having shed 20 percent in itsvalue against the US dollar as both Fitch and S&P cut the South Americancountry's long-term credit rating, citing increased uncertainty and a risingrisk of default.
The peso gained2.75 percent to trade at 58.12 to the dollar on Friday, after several days offreefall were halted Thursday following a joint appeal for calm by PresidentMauricio Macri and his center-left rival Alberto Fernandez. But the outlookremains uncertain after markets went into turmoil following Macri's crushingdefeat by the populist Fernandez in nationwide primary polls on Sunday.
"TheArgentine peso has stabilized over the past few trading days but the collapseearlier this week has made a sovereign debt default highly likely," saidanalysts Capital Economics in a note. Ratings agency Fitch downgraded thecrisis-hit government's credit rating two notches to "CCC" from"B." Standard & Poor's dropped it a single grade from"B" to "B-."
"Thepronounced turbulence of the financial market, with a significant depreciationof the Argentine peso and a rise in interest rates... has significantlyweakened the already vulnerable financial profile," added S&P. "The downgrade of Argentina's ratingsreflects elevated policy uncertainty... a severe tightening of financingconditions and an expected deterioration in the macroeconomic environment thatincrease the likelihood of a sovereign default or restructuring of somekind," Fitch said in its announcement.
Increased risk
Fitch said thecenter-right's crushing political defeat in the primaries "increases risksof a break from the policy strategy of the current administration of MauricioMacri guided by a program with the IMF." Fernandez, now the clear favoriteto unseat Macri in October's presidential election, has questioned the reformprogram backed by a $56 billion rescue package from the International MonetaryFund.
The country iscurrently in a recession and posted 22 percent inflation for the first half ofthe year-one of the highest rates in the world-but the IMF said Macri's reformprogram was beginning to yield results. Macri reacted on Wednesday byannouncing salary hikes and tax cuts in a bid to win back voters with theOctober 27 presidential election looming.
Macri said themeasures would "benefit 17 million workers and their families and allsmall and medium-sized businesses, formal and informal, state andprivate." He also announced an unspecified increase in the monthly minimumwage-currently 12,500 pesos, or $208 -- saying it would benefit two millionworkers. In Buenos Aires, the sudden crisis left many businesses reeling."It took us by surprise," said Juan Manuel Bujia, commercial managerof the Rodo home appliance chain that employs 400 people.
"A lot ofpeople anticipating the increases have been coming in to buy knowing prices aregoing to be higher next week and next month," Bujia told AFP. He said hissuppliers had already priced in 10 percent increases on Argentine products andup to 15 percent on imports. "We are trying to pass on as little aspossible" to customers, he said. US retailer Walmart, which has 92branches in Argentina, said it had seen a 15-20 percent hike in sales volumesbetween Monday and Wednesday and had not yet increased prices. "It happensto us when there is a foreign exchange movement and people want to beat anyprice shift, especially with essentials like oil, sugar, flour, yerba mate andsome dairy products," Walmart official Juan Pablo Quiroga told AFP.
Quiroga said somesuppliers had notified the retailer of price increases "from the end ofthis week or next week." Buenos Aires has a fraught history with the IMF,and Fitch said "policy credibility and market access could still beseverely tested amid weak economic conditions, high public debt andinflation." Argentina defaulted on its debt in 2001 during the worsteconomic crisis in its history, and it took years before it could restore itscredibility in world financial markets. Fernandez said this week he consideredan exchange rate of 60 pesos to the dollar as "reasonable" and saidit should no longer fluctuate wildly. Going into last weekend's primaryelections, the peso was trading at 46.5 to the dollar. - AFP