Argentina FX assignment - Essay Example

Argentina FX assignment Current Account Balance The central bank was prompted to sell its dollar reserves because of the slide of “more than 15% in the trading recorded” Parks, Turner and Lyons 1). Argentina is reported to have since 2002, devalued its currency and defaulted the public debt it possessed. This situation resulted in an eminent explosion of the market according to a currency trader at ABC Mercado de Cambios, known as Frabscisco Diaz Mayer. The strains in the current account balance of the economy of Argentina were due to the populist policies that were implemented by the country’s late president, Nestor Kirchner together with his wife.

GDP growthIt is imperative to point out that the devaluation enhanced speedy growth of the Argentina’s GDP. This growth was the reason for the re-election of Kirchners. The strategy involved setting the prices of Argentinean exports based on the boom that occurred in the commodities’ prices. This was ramped up with the spending by the government. Fiscal BalanceThe devaluation resulted in the tumbling of the Argentina’s fiscal balance from 7.14 per dollar to 8.50 per dollar. Venezuela is reported to have weakened the bolivar through the partial devaluation of its currency.

This was devalued to approximately 11.3 per dollar. This was inclusive of the remittances and tourism in comparison to the rate of 6.3 per dollar, which is the official rate of exchange.Impact on Foreign Exchange reserves and goldThe tumbling of the fiscal balance from 7.14 per dollar to 8.50 per dollar prompted the Argentina’s central bank to resort to selling its reserves amounting to $100 million in order to control the slide. The devaluation is expected to result in a reduction in the “stockpile of dollar reserves” (Parks, Turner and Lyons 2).

Inflation expectationsThe decision by the Argentinean government to shift away from policies that were friendly to the market to populist attitudes that granted the government subsidies that were generous on sectors of the economy led to rise in the inflation that was insinuated to be among the highest across the globe. The devaluation was conducted without letting the international monetary fund to review the free-market policies. This also led to the collapse of the peso. The government implemented various unorthodox policies aimed at regulating the inflation rate.

These included currency controls and price controls through the Argentina’s central bank. The inflation rate for Argentina is estimated to have risen approximately to 25% to 30% according to economists. This estimation is contrary to the government’s records that indicated that last year, the inflation rate stood at 10.9% (Parks, Turner and Lyons 6). Interest RatesDollar crunch was evident in Argentina as the central bank recorded a reduction of its reserves from $52 billion in 2011 to $29 billion by the beginning of the year.

The central bank in its efforts to defend peso, spent approximately $100 million each day. Argentina CaseUsing its international reserves of gold and convertible currencies, adopting tariffs on imports and introducing capital controls, and letting its exchange rate drop within the allowable band around the central parity will help Argentina stabilize its currency. This will help the country thrive in international trade. The value of the dollar will change relative to the peso.Work CitedParks Ken, Taos Turner, and John Lyons.

Argentina Devaluation Raises Fears of a Crisis. n.d.