By Charlie Devereux and Katia Porzecanski

     Jan. 24 (Bloomberg) — Argentina’s peso is poised to extend
losses as the government said it will relax controls on the
currency, a day after allowing the biggest devaluation since
2002 to arrest a decline in foreign reserves.
Argentines will be able to buy dollars for savings in
proportion to their income, Cabinet Chief Jorge Capitanich said
today in Buenos Aires. The peso’s 12 percent plunge yesterday
marked the latest effort by President Cristina Fernandez de
Kirchner to shore up an economy buffeted by inflation running at
an estimated 28 percent and reserves at a seven-year low.
Without a broader policy change to bolster confidence by
restraining spending and raising interest rates, the peso is
likely to depreciate further, Eurasia Group Ltd. and JPMorgan
Chase & Co. said yesterday. The peso dropped as much as 16.5
percent over the past two days to 8.2435 against the U.S. dollar
before the central bank intervened in the market by selling $100
million.
“Argentina is ‘biting the bullet’ but without a full set
of teeth,” Vladimir Werning, an economist at JPMorgan in New
York, wrote in a report yesterday. “Insufficient interest rate or
fiscal adjustment leaves the devaluation vulnerable to generating
more inflation pass-through than achieving real competitiveness
gains the government desires.”

Steepest Decline

The intervention helped trim yesterday’s losses to 9.4
percent from the central bank’s closing price Jan. 22, the
biggest daily decline since the financial crisis that followed
the country’s record $95 billion default in late 2001. The peso
closed at 7.8825 per dollar, and changed hands in the illegal
street market at 13.06 pesos per dollar, according to Buenos
Aires daily Ambito Financiero, which tracks the rate.
“If the bank hadn’t stepped in I don’t know where it would
have gone — surely 10 or 11,” said Francisco Diaz Mayer, a
currency trader at ABC Mercado de Cambio in Buenos Aires.
The central bank has spent a net of $5.9 billion in the
last year to control the peso’s decline. This year, the peso has
weakened 17 percent against the U.S. dollar, more than any
currency in the world. In the same period of 2013, the peso
depreciated less than 1 percent.

Dollar Purchases

The central bank didn’t sell dollars on Jan. 22, allowing
the peso to drop 3.6 percent, according to the bank’s prices.
Capitanich told reporters yesterday the government was
allowing the market to adjust prices.
“We’ve decided to authorize the purchase of dollars for
people according to their declared income level,” he said
today. “We believe that our administered currency policy has
reached an acceptable level of convergence for our economic
objectives.”
Government dollar bonds tumbled an average 3.8 percent
yesterday, bringing the year-to-date losses to 10.5 percent,
according to JPMorgan Chase & Co. That’s the worst among more
than 50 emerging market economies.
Reserves have tumbled at a rate of $1.1 billion a month
over the past year to a seven-year low of $29.3 billion. Energy
imports increased 23 percent to $11.4 billion in 2013 while
exports fell 24 percent to $5.3 billion. Argentine tourists
traveling abroad spent $630 million more than foreign visitors
to Argentina in the first 11 months of last year.

Restricting Access

In the first three quarters of 2013, the nation posted a
current account deficit of $1.27 billion, the largest for that
period since its economic crisis.
Since 2010, Fernandez has used central bank funds to pay
foreign debt. Argentina, which remains locked out of capital
markets as it battles owners of defaulted bonds in U.S. courts,
has set aside a record $9.9 billion to pay foreign debt
obligations in this year’s budget.
Since her re-election in 2011, Fernandez has restricted
access to foreign currency, including a ban on most dollar
purchases by individuals, to stem capital outflows and shore up
reserves.
Argentina’s trade surplus narrowed 27 percent to $9 billion
in 2013 as fuel imports rose and soy prices dropped 28 percent,
while producers withheld stocks of the oilseed waiting for the
peso to weaken further.
The government may allow the peso to decline more in coming
days, said Hernan Yellati, head of research at BancTrust & Co.
“I don’t think that level is written in stone, 8 pesos per
dollar,” Yellati said in a telephone interview from Miami. “It
is the exchange rate that’s going to prevail only for now.
Tomorrow maybe the central bank is going to withdraw again.”

Spurring Inflation

While devaluing the peso will accelerate inflation and curb
growth in the short-term it will close the gap between the two
exchange rates and shore up reserves, said Eric Ritondale,
senior economist at Buenos Aires-based research company
Econviews, who expects the economy to contract in the first
quarter as purchasing power weakens due to declining salaries.
Annual inflation quickened to 28.4 percent in December,
according to private estimates published by opposition
lawmakers. Inflation was 11 percent, according to the
government, which plans to introduce a new index next month
after being censured by the International Monetary Fund for
misreporting economic data.
“It’s better to do this now than never,” Ritondale said
in a phone interview. “In the medium term this will have a
positive effect.”

Interest Rates

It’s key that the central bank complement the devaluation
with an increase in short-term interest rates to boost demand
for the peso, said Jorge Mariscal, regional chief investment
officer for emerging markets at UBS Wealth Management.
Argentina’s benchmark deposit rate, known as the badlar, has
fallen 0.62 percentage points this year to 21 percent.
“This is what the forces of supply and demand have been
asking for some time, so the depreciation of the exchange rate
in Argentina is part of the beginning of the solution.”
Mariscal, whose firm oversees $968 billion, said in a telephone
interview from Washington. “It will really test the skills and
independence of the central bank preventing this from becoming a
downward spiral.”