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– This is the script of CNBC's news report for China's CCTV on August 31, 2018, Friday.
In the overnight, we see Argentina Central Bank took aggressive currency protection actions. First, Central Bank monetary policy meeting decided to raise the benchmark interest rate by 1,500 basis points, from 45% to 60%. The 5th time increasing interest rates cause the benchmark interest rate jump to the highest level globally. Meanwhile, Argentina Central Bank also raised the reserve requirement ratio for private banks by 5% points. Additionally, Argentina Central Banks said the interest rate will keep at current level and won't down before Dec this year in order to comfort market sentiment and currency volatility. However, instead of making the market didn't go for that "shot in the arm", Argentine peso plunged again against dollars, with a drop of 20% overnight.
At the closing bell, a 10% gain was seen in dollar against Argentine peso, making Argentine peso depreciated over 50% this year, even worse than Turkish Lira, being the currency with worst performance in the emerging market this year. And we can see that from 2014, USD shows a stable upwards trend against Argentine peso and grows faster from April this year, causing Argentina be stuck in the currency crisis.
Institute of International Finance
Senior Director Global Capital Markets
If you see the underlying root cause of these problems, as the gradual fed tightening, less central bank liquidity, then you have a number of idiosyncratic shocks, you have the issues in Turkey, you have Argentina, rating rates to 60%, a lot of individual EM countries suffering.
Many people may recall the Argentina financial crisis happened in 2001.
At that time financial crisis triggered crisis in fiscal, society and international political. After that, Argentina currency devalued more than 60%, and over 50% plants shut down, per capita income also fell by half. Then, the government's debt default worsened the economy and caused millions of middle-class Argentines poor. Afterwards, the economy stabilized when the commodity prices soared and a series of economic reforms introduced by Former President Kirchner, who took office in 2003.
From 2003 to 2007, its economy increased 8% per year; we can see from the chart that economy index shows a consecutive gain, but obviously, crisis causing a prolonged blow to a country, such as financial crisis in 2001, and the global financial meltdown in 2008.
But now, how will the currency crisis affect Argentina, which is the 3rd biggest economy in Latin America? And whether it's going to have a spillover effect or a domino effect? Those are market concerns. But some analysts think global economy is robust generally, and the fundamentals of many emerging economies are also better than before, so the challenge Argentina and Turkey faced may be just an isolated event.
Payden & Rygel Managing Principal
There are the kinds of events that in the past would have triggered a meltdown in the markets These events may trigger shor-run selloffs, what we see almost every time is a relatively turn around in the market, and I think thats the pattern we are gonna continue to see.
How will Argentina government deal with current market volatility? How much can IMF help? Those are unknown problems now. But the challenge is international investors are prone to lose faith to president Macri, doubting whether he could boost economy and keep budget deficit trade deficit and inflation under control. We will keep an eye on this issue.