What happens to the state stock exchange with interest close to 100%? – Money Times

a Argentina immersed in hyperinflationary crisis. In April, the consumer price index increased by 8.4%, outpacing – by far – the price increases in other countries with uncontrolled inflationary trends, such as Chile and Venezuela.

This completes the platinum state Third month in a row with annual inflation above 100%, without the perspective that May will bring different news.

In an effort to contain the disaster at the cost of the lives of the population, the government of Alberto Fernandez He announced an emergency package of economic measures. Among them an increase in the interest rate to 97% per annum and direct intervention by central bank Argentinean in the country’s exchange rate.

If expectations of triple-digit interest rates are enough to horrify the domestic economy, no one sector in particular seems to have identified such a brisk reaction. This is the capital market.

Despite the seriousness of the situation, the S&P Merval Index (merv) from the stock exchange Buenos Aires Yesterday’s trading session – the date the package was announced – closed down less than 1.0%. Today, the MERV’s decline was around 0.30%.

The reason for the “de-indexing” of the stock index to the realities of the country is simple: asset prices on the Argentine stock exchange are denominated in US currency, As a result of the market’s lack of confidence in the local currency.

The dollarization of the economy has been a process that has taken place since the end of the 1980s, but it gained new momentum after the 2000s, when the Argentine peso began devaluing almost 99% at the official exchange rate.

Argentina’s Bolsa was champion in 2022, but that doesn’t mean much

Using the dollar as a parameter, the Argentine Stock Exchange was the market More progress in 2022. The stock index gained 30.8%, reaching 543 points.

The rise in the Argentine stock exchange was due to two factors that also accompanied other emerging markets in 2022. They are: evaluation deduction from assets that it High prices of energy and agricultural commodities in the international market.

But since the turn of the year, the stock market has run out of steam as the country faced its worst drought in the past 60 years. Severe weather events have severely affected the production outlook for the Argentine agricultural sector, which accounts for a significant volume of trading on the stock exchange.

No wonder the MERV index returned to a decline exceeding 40% in the year, against a rise of 1.71% in ibovespa. Using the last 40-year window as a comparison, the current performance of the Argentine index is 70% below the historical average.

Now, with the new package of drastic measures in effect, Marco Saravalli, co-founder of SaraInvest, analyzes that the environment must become more arid to generate business.

This is because although the return on equity loan is higher, which may facilitate the exodus of foreign investors, the collapse of the exchange rate base and cost pressure end up neutralizing returns.

As Saravalli explains, one of the factors motivating the current situation in Argentina was the temporary abandonment of inflation targets by the central bank. This measure soon fell short of the country’s price expectations, something the government was also slow to respond to.