Argentina plans emergency economic measures to avoid major devaluation

Argentina will announce a new round of emergency government measures on Monday, including raising interest rates by 600 basis points to 97 percent, to try to stave off the country’s worst economic crisis in two decades.

The Peronist government is desperate to avoid a major devaluation ahead of elections in October. But the South American country is also running out of foreign exchange reserves as Argentina abandons the rapidly devaluing peso and embraces the US dollar.

Fueled by money printing to cover a large government deficit, Argentina’s inflation reached 109 percent year-on-year in April, the highest level since 1991. The economy ministry said new measures to be announced on Monday would include central bank intervention. in the foreign exchange market to try to slow the peso’s decline.

Economy Minister Sergio Massa is also trying to persuade the IMF to step up disbursement of the agreed loans and will travel to China on May 29 to seek greater use of the renminbi in foreign trade. Last month, Argentina launched a currency swap with China, allowing it to pay for just over $1 billion of its imports this month in renminbi.

The IMF has already shown leniency toward Argentina over the past year, giving it more leeway on targets to raise reserves and reduce money-printing in an effort to keep a $44 billion loan program on track. The disbursement is unlikely to be brought forward in the months before a potentially crucial election, which the government is likely to lose.

Massa also plans to allow imports of food at zero tariffs to try to tame inflation, a first for the country, one of the world’s biggest grain exporters. The government will also reduce interest rates on a state-run scheme for Argentines to buy locally manufactured products on credit as part of an effort to boost national industry.

The latest package of measures does not represent a change of course, but rather an attempt to replicate policies of heavy state intervention that have failed to reduce inflation or boost the economy. There are also risks involved: The steady rise in interest rates is making servicing a large pile of home loans increasingly costly.

“It’s kicking the can a few inches down the road,” said Hector Torres, former IMF executive director and Argentine diplomat, who is now at Canadian think-tank CIGI.

“I have nothing against central banks that use reserves to smooth out volatility and fight speculators. But we are already out of reserves, deeply indebted to the IMF, have no access to capital markets. In that case it is reckless to sell what we owe to the IMF in order to shore up an obviously volatile exchange rate. It can only invite speculators to bet on a new default.”

Economists have criticized the government’s foreign exchange and price controls for causing massive distortions, stifling investment and reducing output. Many forecasters expect Argentina to enter recession this year, with Oxford Economics forecasting a 1.6 percent drop in GDP, the worst outlook for any major Latin American economy.

Massa is seen as one of the Peronist movement’s few remaining options as a presidential candidate for the October elections, amid bitterness over policy between President Alberto Fernandez and his powerful vice-president Cristina Fernandez de Kirchner.

However, his plan to patch the economy with temporary interventions to avoid painful austerity measures ahead of the election has run into growing difficulties, compounded by a severe drought that has hurt agricultural exports. Massa’s prospects as a candidate now depend on the success of his economic plan over the next few months.

The center-right opposition has yet to agree on a presidential candidate, with support split between Buenos Aires’ centrist mayor Horacio Rodríguez Larreta and conservative law-and-order candidate Patricia Bulrich.

A far-right contender, Javier Miley, is rising rapidly in the polls and could reach a second-round run-off if he can increase his support beyond Buenos Aires. Mili has campaigned on a radical anti-establishment platform that includes dismantling the central bank and dollarizing the economy.