On Wednesday evening, Argentina’s FinMin (and former head of global FX research at JP Morgan) Alfonso Prat-Gay abolished currency controls, fulfilling new President Mauricio Macri’s promise to unify the official and black market peso rates.
The move came on the heels of central bank governor Alejandro Vanoli's forced resignation. Macri has accused Vanoli of endangering the country's finances by racking up some $17 billion in dollar futures which the new government attempted to renegotiate ahead of the deval.
“For those interested in a case study of what happens after a dramatic devaluation, you now have front row seats for what is likely to be a 25-30% peso plunge,” we said two days ago. Yesterday, the peso did indeed take a nosedive as the parallel rates converged on 14 ARS/USD.
What does this mean for Argentinians, you ask?
Well, as FT reports, “Argentines woke up on Thursday richer than Poles, Chileans and Hungarians [but] by bedtime they were not only poorer than all three, but also more pecunious than Mexicans, Costa Ricans and the good people of Equatorial Guinea.”
In dollar terms, the sharp peso plunge pushed the country down eleven slots on the list of richest nations in GDP per capita terms. As the following table shows, Argentineans are now worse off than citizens of Chile, Poland, Equatorial Guinea, Hungary, Lebanon, Panama, Croatia, Kazakhstan, Costa Rica, Malaysia, and Mexico.
More generally, the devaluation will cost the country some $167 billion in GDP. "[This is] just the latest ignominy to hit the seemingly accident-prone nation, which just over a century ago was the seventh-wealthiest country in the world on a per capita basis, ahead of the likes of Denmark, Canada and the Netherlands and five times wealthier than Brazil," FT goes on to say.
While the devaluation is likely the right move from a long-term perspective, in the short-run things will be painful. “The peso devaluation is a bitter pill for Argentinian households who kept their savings in pesos and for multinationals who had reported peso cash balances at the official exchange rate on financial disclosures,” Bill Adams, senior international economist at PNC Financial Services Group says.
And with that, we'll close with a few passages from one of the world's greatest economic minds. This is from May 3, 2012:
"...press coverage of Argentina is another one of those examples of how conventional wisdom can apparently make it impossible to get basic facts right.
Articles about Argentina are almost always very negative in tone — they’re irresponsible, they’re renationalizing some industries, they talk populist, so they must be going very badly.
Matt Yglesias, who just spent time in Argentina, writes about the lessons of that country’s recovery following its exit from the one-peso-one-dollar 'convertibility law'. As he says, it’s a remarkable success story, one that arguably holds lessons for the euro zone."