December 17, 2015 / 1:05 AM / 2 years ago

Argentina lifts currency controls, floats peso in bid to boost economy

Argentina's President Mauricio Macri waves after being sworn-in as president at Casa Rosada Presidential Palace in Buenos Aires, Argentina, December 10, 2015.Marcos Brindicci

BUENOS AIRES (Reuters) - Argentina said on Wednesday it was lifting its currency controls and would allow the peso to float when markets open, setting the stage for a sharp devaluation, following promises by President Mauricio Macri for reforms in order to increase exports and spur economic growth.

Macri, a free-market advocate who took office last week, has vowed to regain investor trust in Argentina, shattered by its 2002 record default, a lack of trustworthy official economic data and heavy state intervention.

Argentina's previous leader, Cristina Fernandez, used central bank reserves to prop up the peso.

By lifting controls, Macri also hopes to spark a wave of investment in an economy that is battling low foreign reserves and double digit inflation.

"He who wants to import will be able to do so, and he who wants to buy dollars will be able to buy them," said Finance Minister Alfonso Prat-Gay, adding that this government intended to normalize the economy, after eight years of interventionism under Fernandez.

Farmers in Argentina, a grains-exporting powerhouse, have been waiting for the peso to weaken before selling stockpiles of soybeans. Manufacturers have argued for controls to be lifted so they can import crucial parts for production.

Asked what he expected the exchange rate to be now, Prat-Gay said there was "no magic number."

However, the most realistic level at the moment was the blue-chip swap rate, used to buy Argentine assets traded abroad. That rate is currently around 14.2 pesos per dollar, compared with the official exchange rate of 9.8275, implying a devaluation of around 30 percent.

"Let's see what happens tomorrow. The policy will be what economists call a 'dirty float,'" Prat-Gay said. "There will be fluctuations in the exchange rate but there will also be a central bank with the necessary tools to buy if the currency weakens too much or sell if it strengthens too much."

Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management in New York, said it was positive to see the new government immediately tackling the currency issue.

"The exchange rate was very important because it will eliminate all the distortions that were in the market," he said.

Mariscal said there was a chance the peso could weaken more than 30 percent at the start, "but there is also a significant chance that it comes back rather quickly."

"There is a lot of Argentine money outside waiting to come back once the new team builds some credibility," he said.

However, many Argentines fear the devaluation will lead to another spike in prices, with inflation already running at around 25 percent, according to private estimates.

ENOUGH DOLLARS TO GO AROUND?

In order to ensure there are enough dollars to go around, Argentina was securing various sources of financing and expected inflows of $15 billion to $25 billion over the coming month, Prat-Gay told reporters.

He expected the central bank to reach a deal with foreign banks within 10 days for a credit line worth more than $5 billion. Last week, a banking source told Reuters that Argentina was in talks over a loan with HSBC (HSBA.L), JPMorgan Chase & Co. (JPM.N), Goldman Sachs (GS.N), Deutsche Bank (DBKGn.DE) and Citigroup Inc (C.N).

The South American country has been restricted from accessing international capital markets for years by a long-running legal battle with creditors over unpaid debt that Macri has promised to settle later in tough negotiations.

A deal with banks now would give the country a better negotiating hand at talks with the litigating creditors.

Prat-Gay said on Wednesday that Argentina would also convert a large stock of Chinese yuan CNY= from its currency swap with China into dollars in the next few hours.

It has also sealed a deal with grains exporters to liquidate $400 million of produce per day over the next few weeks, he said.

Alejo Costa, chief strategist at local investment bank Puente, said the new government's policy move was bold and had good chances of succeeding. He said he expected an initial exchange rate of 14-14.5 pesos per dollar.

"He sent the correct message, that they have the strength to defend the currency at certain levels, and conveyed the confidence needed to anchor expectations," Costa said.

Additional reporting by Jorge Otaola in Buenos Aires and Daniel Bases in New York; Writing by Sarah Marsh; Editing by Leslie Adler

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