Debt dollarisation poses dilemmas in Argentina

Subject

Monetary, fiscal and debt concerns.

Significance

After falling to nearly 16 pesos/dollar in early March, the exchange rate stabilised, mainly due to rising domestic interest rates, which climbed to a peak of 38.0%. Monetary tightening and the deepening of the economic downturn helped to bring down inflation, which is expected to reach a monthly rate of 1.5% in the last quarter. Lower interest rates and decreasing inflation are needed to drive an economic rebound, key to the government's prospects in October 2017 mid-term elections.

Impacts

• Dollarisation of financial liabilities will leave the economy more vulnerable to negative external shocks.
• The economy may show further decline in third-quarter figures.
• Moderating inflation and monetary and fiscal policy support are expected to help turn growth positive in 2017.