Tag: devaluation

Argentina's Peso Crisis

Navigating Volatility: A Closer Look at Argentina’s Peso Crisis

Written by Kai Donesa on . Posted in Uncategorized.

Birches Group monitors labor market trends making headlines worldwide, ensuring you are updated on the latest developments.

On 14 August 2023, the Argentine government took the bold step of hiking interest rates and decreasing the value of its currency. This intervention came a day after the country’s primary elections, adding a layer of uncertainty and volatility to Argentina’s economic landscape.

Unexpected timing

After far-right and anti-establishment candidate Javier Milei obtained the most votes, the results sparked a sell-off of the Argentine peso, shares, and bonds. Anticipating a market backlash, the Banco Central de la Republica Argentina (BCRA) devalued its currency by 20% (to AR$350 per dollar) to reassure jittery investors. The Buenos Aires Timesreports that the devaluation was the largest in a single day since December 2015. The BCRA said the move would help cushion “exchange rate expectations and minimize the repercussion on prices.”

The BCRA added that the peso would be held at AR$350 per dollar until the general elections in October. But many news outlets and think tanks say the devaluation leaves the official exchange rate far from the parallel market rate, which is AR$690 per dollar.

Reuters cites that the financial markets had been betting on a solid performance by a more moderate political candidate. Bloomberg reports that Milei, a representative and economist, supports dollarizing the economy. Riding on a wave of popular discontent, Milei has also called to liberalize the economy, vowed to abolish the central bank, and advocated for sharp spending cuts.

“Investors like Milei’s economic message but fear the execution and institutional risk, considering his lack of power and aggressive style,” a chief Argentina strategist at a financial services company told Bloomberg. “Milei represents uncertainty,” a fixed-income strategist at an investment management firm shared.

With negative international reserves, inflation at over 120%, poverty at 40%, and tight capital controls among its many economic woes, Argentina faces fresh uncertainty ahead of the October elections.

Argentines feel the impact

The recent drop in the peso’s value has affected ordinary Argentines, worsening already high inflation and making everyday life more challenging. The prices of essentials have skyrocketed, putting a strain on household budgets. In fact, consumer goods companies have increased their prices by nearly 10%, further stretching purchasing power.

To make matters worse, supermarkets have confirmed that the supply of goods has been disrupted, making it harder for people to find and afford the necessities they rely on.

Additionally, the devaluation of the peso is expected to have a ripple effect on gas prices, as oil companies expect their costs to rise. This means that Argentines will also face higher prices for transportation and utilities.

Due to economic hardship, the savings of many Argentines have further eroded. The cost of living has reached crisis levels, making it increasingly difficult for people to meet their basic needs. There are concerns that, if the situation worsens, the country could face hyperinflation.

What our Market Monitor says

Our Market Monitor report offers a sobering analysis:

1 January to 1 June 2023. During the first half of the year, Argentina alternated between Levels Two and Three (out of six levels of volatility), with an average exchange rate movement of 39.9%. Level Two shows dynamic market conditions and an exchange rate movement of over 20% in the past six months. On the other hand, Level Three shows rapidly evolving market conditions and an exchange rate movement of over 40% in the past six months.

15 June to 15 August 2023. From 15 June to 15 August, Argentina climbed to Level Three with an average exchange rate movement of 44.8%.

1 September onwards. Beginning on 1 September, Argentina’s level of volatility rose to Level Four. This level of volatility reflects a sudden, unexpected social or economic event (i.e., the peso devaluation, among other factors) or a currency devaluation of at least 50% in six months. In the case of Argentina, the exchange rate moved by 74.4%.

Our latest salary surveys report that many organizations still denominate salaries in Argentine pesos, keeping the South American country at Level Four.

How Birches Group can help

Argentina’s peso crisis underlines the importance of developing a Special Measures Policy in response to economic instability. Such policies can help protect your organization and employees from economic shocks.

If your organization grapples with the effects of market volatility and needs help formulating a clear Special Measures Policy, our consultants are here to assist you. With their extensive experience and in-depth understanding of emerging labor markets like Argentina, they can provide you with the tools and advice you need to navigate these uncertain times.

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An aerial view of a city with buildings and a river.

The Impact of Devaluing the Nigerian Naira

Written by Kai Donesa on . Posted in Uncategorized.

Birches Group keeps an eye on labor market trends that are making headlines across the globe, ensuring you are up to date on the latest developments.

On 14 June 2023, the Nigerian naira lost a staggering 25% of its value compared to the previous day, macroeconomic intelligence provider Focus Economics reported.

The sharp devaluation was caused by the Central Bank of Nigeria’s decision to allow the naira to fluctuate freely, letting market forces determine the exchange rate. The Central Bank also implemented several reforms, including scrapping the segmentation of its foreign exchange market. For six years, the local exchange rate was held artificially low and changed little.

A welcome, bold start

Following his inauguration on 29 May 2023, President Bola Tinubu hit the ground running with a string of sweeping changes. He noted Nigeria’s monetary policy needed “thorough house cleaning” to help the economy become more competitive. Within his first three weeks in office, Tinubu embarked on some of the most radical reforms in decades:

Petrol subsidy removal. By ending its longstanding petrol subsidy, the Nigerian government is projected to achieve fiscal savings of nearly 4 trillion naira (US$5.10 billion) in 2023. These savings are expected to reach over 11 trillion naira by the end of 2025.

Suspension of Central Bank governor. On 9 June 2023, Tinubu suspended Central Bank Governor Godwin Emefiele following divisive policies. During Emefiele’s term, a black market for foreign exchange thrived.

Reforms in the foreign exchange market. Foreign investors have flagged Nigeria’s foreign exchange restrictions as an obstacle to investing. The move towards a more unified and market-responsive exchange rate will foster a stable economic environment and prevent the dollarization of the economy.

According to Reuters, Tinubu inherited anemic economic growth, record debt, and shrinking oil output. However, he has promised to put the economy back on track and asked Nigerians to support painful decisions. The speed of his decisions took many by surprise.

Short-term pain vs. long-term stability

Every day Nigerians are feeling the brunt of the government’s economic shakeup. The Guardian reports that, while Tinubu’s policies please foreign investors, the devalued naira means ‘national sacrifice mode.’ People are feeling the strain as their new president pushes through the widely unpopular policies. Living costs have further increased.

The currency devaluation is already pushing prices amid a significantly higher foreign exchange rate, cites Africanews. This change will cause considerable short-term pain but will correct the economy, say economic analysts. Nevertheless, Nigeria continues to face rising inflation and increased poverty rates, pressuring the government to address concerns.

On a positive note, the recent changes are considered a welcome development. The floating exchange rate is expected to strengthen investor sentiment and bring in much-needed capital. Observers have described the transition as a “window of opportunity” that could have a transformative impact on millions of Nigerians.

The steps have fired up markets, sending stocks in Africa’s largest economy to their highest level in 15 years. For its August 2023 Nigeria economic outlook, professional services firm PwC reported that the positive investor sentiment drove up the market capitalization of the stock exchange by 9.3%. “Just the fact that you have seen quite a bit of movement in a relatively short space of time has gotten a lot of people in the market excited,” Goldman Sachs economist Andrew Matheny told Reuters.

In a statement, the World Bank said, “The recent removal of the petrol subsidy and the foreign exchange management reforms are critical steps to address long-standing macroeconomic imbalances and have the potential to establish a solid foundation for sustainable and inclusive growth.” “Deepening and sustaining these changes is imperative to enable Nigeria to break out of the cycle of macroeconomic instability, low investment, sluggish economic growth, escalating poverty, and fragility.”

The World Bank expects growth in Nigeria to increase: “While inflation will be higher in 2023, it will be lower in 2024 to 2025 if the right policy mix is sustained.” The creditworthiness and investment profile of the country is also expected to improve.

Bismark Rewane, Chief Executive Officer at Financial Derivatives Company, a Lagos economic think tank, told Reuters, “What we are seeing is the removal of distortions created by inefficient pricing of foreign exchange and in the next few weeks we should start seeing the naira finding its level.” Business Insider Africa says that market participants and stakeholders are closely watching the effects of these significant changes.

What our Market Monitor indicates

In early July 2023, Nigeria entered our list of potentially volatile labor markets at Level Four (of six levels). Level Four shows signs of a sudden, unexpected economic event, as well as a devaluation of the local currency by at least 50% in six months or less. According to the 15 August 2023 edition of our Market Monitor report, the naira dropped as much as 67% in the past six months.

Although this significant devaluation could classify Nigeria at a higher volatility level, our latest salary survey reports that most organizations still denominate salaries in the naira, keeping Nigeria at Level Four for the time being.

Organizations in Nigeria should remain vigilant and closely watch the ever-evolving economic landscape. Staying attuned to shifts in labor market trends, exchange rates, and government policies is imperative to make informed decisions. By being keenly aware of these factors, you can adapt strategies and ensure the sustainability of your business in Africa’s most populous nation.

How Birches Group can help

Get insights into what to consider when your organization develops special policies in response to volatility. Published in English, Spanish, and French every two weeks, our Market Monitor report examines the labor market conditions of over 150 countries for signs of potential volatility.

Subscribe to our biweekly Market Monitor today. Download the 1 and 15 July 2023 editions of our report, where we focus on how you can manage the situation in Nigeria.

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