Argentine peso hits new lows as food price controls take effect

Argentina’s peso slid to an all-time low on Tuesday as supermarkets implemented food price freezes in an agreement with the government aimed at protecting poor families from one of the world’s highest inflation rates.

The year-long price deal on 200 basic food products, agreed to last week and implemented Monday, signals a deepening of President Cristina Fernandez’s interventionist policies. With two years left in her second term, food prices are being pumped higher in part by the devaluation of the peso.

Polls show her reputation has been battered by 25 per cent inflation, falling central bank reserves and electricity shortages caused by low investment after implementing tight currency and trade controls and seizing the country’s top energy company YPF last year.

Investors eager to get in on Argentina’s vast grains sector and promising shale oil reserves had hoped for a change toward business-friendly policies when Fernandez lost congressional clout in the October midterm election. But since then she has doubled down in defense of her unorthodox policy model.

Nervous about holding the anemic peso, Argentines are desperate to get their hands on U.S. dollars. The trend had compounded the strain on the local currency, which slid to an all-time low of 10.73 to the greenback on Tuesday, according to the unofficial (black market) exchange rate.

“Food prices are going up in part because of the pass through from the currency depreciation. The price freezes address the symptom, not the root causes of the problem,” said Gary Kleiman, head of the Kleiman International consultancy.

“For that you would need disciplined fiscal and monetary policies, and a more open policy toward foreign investment,” he said. “The price deal shows the government is not going in that direction. If anything, it is hardening its previous stance.”

The black market peso was at about seven per dollar a year ago. Tuesday’s slump widened the gap between the official and unofficial exchange rate to more than 62 per cent.

Uncertainty about how fast the U.S. Federal Reserve will continue to reduce its bond purchases has contributed to the peso’s slide by sapping investors’ appetite for higher-yielding, riskier emerging market assets.

The country is meanwhile trying to attract tens of millions of investment dollars to its Vaca Muerta shale oil formation.

Lying beneath the Patagonian plains, the Vaca Muerta (Dead Cow) field is estimated to hold 661 billion barrels of oil and 1,181 trillion cubic feet of natural gas. It could be one of the biggest formations of its kind in the Western Hemisphere.

Kicillof’s first move

The supermarket price freeze is the biggest policy move yet by fledgling Economy Minister Axel Kicillof, a leftist academic appointed in November.

The choice of Kicillof to guide Latin America’s No. 3 economy shored up her support in the Campora, the organization of young socialists headed by her son Maximo Kirchner. To balance the appointment she named Chaco Governor Jorge Capitanich, a practical political operator, as cabinet chief.

The main supermarket chains operating in Argentina include units of Chile’s Cencosud, France’s Carrefour and the United States’ Wal-Mart.

Grains powerhouse Argentina is the world’s No. 3 soybean and corn supplier as well as its top provider of soymeal animal feed and soyoil, used in the booming biofuels sector.

Locked out of the global bond market since its 2002 default, Argentina wants a more competitive peso to strengthen exports. This is the motivation behind the acceleration of the pace of currency deprecation over the last few months, said Alberto Ramos, who analyzes the country for Goldman Sachs.

“But the authorities fear the impact on inflation, which is already approaching 30 per cent. Since they do not seem ready to tight fiscal and monetary policy, they continue to resort to heterodox measures such as price controls and so-called voluntary price agreements,” he said.

The vicious circle of low confidence and falling central bank reserves — which shed $13 billion in 2013 to end the year at $30 billion — is likely to continue in the months ahead as labour unions get set for tough wage negotiations based on private inflation estimates.

Widely discredited official figures put inflation in the 12 months through November at 10.5 per cent while private economists say Argentine inflation is running at more than 25 per cent annually.

“Without meaningful efforts to bring inflation down, especially in terms of reducing fiscal spending, pressures on reserves will likely remain high in 2014,” said a report issued on Monday by the Eurasia Group consultancy.

– Hugh Bronstein reports for Reuters from Buenos Aires.