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Goldman Sachs Note USD/ARS Risks Firmly Skewed To Upside

ARGENTINA
  • Goldman Sachs have noted that the recent resignation of Economy Minister Guzman could be another source of concern for the already difficult relationship between the government and the IMF, at a point when Argentina remains in need of external financial support.
  • The new ministerial appointment and internal government dynamics appear likely to leave the policy agenda on a notably heterodox path, as debt monetisation continues at a fast pace amid persistent dysfunctionality in the local debt market, capital controls continue to produce wide spreads between parallel and official exchange rates, and with trade controls (aimed at moderating reserve outflows) causing significant shortages (of fuel, primarily).
  • Owing to FX controls, the official USD/ARS exchange rate remains far from being a market-clearing price, and its current crawling peg against the Dollar looks even less sustainable, in an environment of unanchored domestic inflation expectations and with the currencies of key trading partners weakening meaningfully (causing the official exchange rate to continue to appreciate sharply in real trade-weighted terms).
  • The near-term slope of the official exchange rate remains a function of policy makers’ political considerations rather than actual near-term market forces. But the longer the current policy mix remains in place, the deeper the economic damage likely caused, in Goldman’s view, and the larger the eventual depreciation of the official exchange rate will need to be.
  • As such, the medium-term risks for the official exchange rate remain firmly skewed to the upside relative to their baseline forecast of USD/ARS at 180 in 12 months' time, and GS expect further political developments to continue to meaningfully impact parallel market spreads in the near term.
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