EFTA01379425.pdf

22 December 2017 EM Currency Handbook 2018: Still Fuel in the Tank Argentina Argentine FX arrangements were plagued by monetary prohibited and severe restrictions were imposed on mismanagement and inflation throughout most of the capital outflows. Regulations will likely remain twentieth century leading to periodic large devaluations. restrictive, negatively affecting liquidity in NDF and The Peso Ley replaced the Peso Moneda Nacional in options markets. 1970 at a rate of 100 to 1, which was itself replaced by the Peso Argentino at a rate of 10,000 to 1 in 1983. In USDIARS spot and REER 1985, this was again replaced by the Austral at a rate 190 0 190 of 1,000 to 1, though this soon collapsed via hyper- 170 inflation. Beginning April 1st 1991, Argentina operated 1440 60 140 a currency board system with the Peso (converted from 130 the Austral at 10,000 to 1) pegged to the dollar at the 120 , 120 II 0 rate of one to one, every peso in principle backed by 100 90 hard currency reserves. The "Convertibility Plan," was I00 conceived to solve Argentina's chronic inflation 1 problems, and throughout the first half of the 1990s the 40 240 30 system underpinned an economic boom, with inflation 20 10 declining to single digits. However, as the decade 00 300 Jan-00 Jan02 Jes704 Jan06 Jan-0.3 Jan-I0 Jan12 Jan-14 Jan-16 wore on, the real appreciation of the dollar placed the system under strain as REER became increasingly I.ISDIASIS, Ohs) —REEK amerced rho overvalued. The combination of persistent budget imbalances, negative terms of trade shocks, and 3M and 12M USD/ARS (offshore) NDF implied yield inflexible monetary policy eroded credibility and 400 culminated with the abandonment of the currency peg 350 on January 6th, 2002. 300 Floating the currency led to a 70% devaluation of the 250 Peso, taking it from one of the most overvalued to one 200 of the most undervalued currencies in the world. Since then, the exchange rate has been tightly managed and 150 capital flows strictly controlled. As the economy 100 recovered from the 2002 crisis, inflation increased once so again (albeit under-reported by the government since 0 early 2007), undermining the competitiveness of the Jan00 Jan-02 JarH)4 Jan06 Jarnte Jan70 Jan12 Jan-IA Jan-16 exchange rate. During the global crisis of 2008, the authorities faced the challenge of allowing the currency —ARS 3minpied NIS —ARS 12m Inwattl Yield Sanee. DB OfteatilanueResaincA Absenberp Ann*IP, BIS to depreciate but without triggering a sharp currency substitution. The Central Bank of Argentina (BCRA) embarked on a managed depreciation path, which by 1M USDIARS implied volatility and realized volatility the middle of 2009 was successfully completed. 120 After 2010, the Central Bank followed a more gradual, 100 depreciation trend significantly below inflation. In order to stop capital flight and rein in the exchange rate, in so November 2011 the government introduced several 60 currency controls which lead to the development of a vast black market. In mid-2013 the path of depreciation 40 accelerated in an attempt to account for an 20 accumulated real appreciation of more than 30% since 2010. This was followed by a 15% depreciation in 0 January 2014. Nonetheless, peso devaluation was not Dec-04 Dec-06 Dec-C6 Dec-I0 Dec-12 Dec-14 Dec-I6 accompanied by the necessary tightening of fiscal and —ARS lm Invalid Val ARS IrnfloalascIVol monetary policies, leading to inflation accelerating to 40% YoY (from 25% before). Consequently, the Sam Orancher Bar* currency quickly became overvalued. The currency is not convertible, and most USD inflows are subject to a mandatory, unremunerated one-year deposit at the In December 2015, the new government led by Central Bank. In November 2011, the government President Mauricio Macri dismantled most of the FX stepped up the restrictions to trade in the local controls introduced by the previous administration, currency market and forced some repatriation of funds including restrictions on imports of goods and services (see below). In addition all types of USD hoarding were and profit remittances and the mandatory non- Page 90 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0076893 CONFIDENTIAL SDNY_GM_00223077 EFTA01379425