Jan. 13 (Bloomberg) -- Argentina is starting to catch up with Brazil in devaluing its currency, helping Buenos Aires yarn maker Marcelo Prim at the risk of igniting inflation and a run on the nation’s banks.

Prim, 45, halted exports, sent workers home early and cut production by almost a third as demand for Hilados Edolan SA’s acrylic yarns evaporated after the Brazilian real weakened 33 percent against the dollar since August. Argentine exports to Brazil, Latin America’s biggest economy, fell 16 percent in November to $1.1 billion, the biggest monthly slide since January 2007, according to government data.

“The currency sank, and they stopped importing,” said Prim, director of Edolan. “We lost our competitive edge.”

Argentine President Cristina Fernandez de Kirchner has allowed the peso to weaken 6.7 percent over the past three months to 3.4507 per dollar in a gradual decline aimed at shoring up economic growth. Merrill Lynch & Co. joined Morgan Stanley, Barclays Capital and Bank of America Corp. yesterday in predicting the peso will be the region’s worst performer in 2009.

“They will let it go little by little,” said Alejandro Cuadrado, a Latin America economist with Merrill in New York.

Merrill forecasts the peso will weaken to a record low of 3.9 per dollar by year-end. The median forecast in a Bloomberg survey of 12 economists is for the peso to end 2009 at 3.95.

A central bank spokesman said policy makers are trying to avoid sharp fluctuations in the currency and don’t have a target exchange rate.

Nervous Depositors

The peso has fallen in all but eight of the past 42 sessions, including an 18 straight-day slide that was the longest since its creation -- to replace the austral -- in 1992. Its decline since early October is the steepest in Latin America while Brazil’s real has steadied, rising 0.4 percent, after plunging from a nine-year high in August.

Allowing the peso to weaken may discourage savers from keeping money on deposit in Argentine banks, said Sebastian Vargas, an economist at Barclays in New York.

A run on banks in 2001 contributed to the nation’s financial collapse that December, when the government defaulted on $95 billion of debt. The peso slumped as much as 74 percent within six months to a record low of 3.86 per dollar.

Lines of dollar-seekers spilled onto sidewalks in Buenos Aires twice last year -- first during a four-month protest by farmers that disrupted food supplies until July and again after the president announced plans in October to nationalize private pension funds.

Declining Reserves

The government’s benchmark 8.28 percent dollar bonds due in 2033 fell to as low as 22.5 cents on the dollar in October amid concern the pension fund seizure was a bid to stave off another default as tax revenue slumps. The bonds trade at 32.75 cents today, according to JPMorgan Chase & Co.

After the central bank burned through almost $1 billion in reserves in a week following the pension announcement to avoid an inflation surge, the government changed gears to preserve hard currency. Officials clamped down on a loophole that allowed Argentines to buy peso-denominated securities at home and sell them abroad for dollars. The securities regulator, tax agency, and central bank stepped up inspections of banks and brokerages.

“The main risk for the overall economy is that the government is not able to engineer an orderly, needed, real depreciation,” Vargas said. Barclays predicts the peso will drop to 4.1 by year-end. “The central bank fears that a movement in the exchange rate would trigger a deposit run,” he said.

Commodities Tumble

Last year’s runs prompted Argentina to buy pesos to bolster the currency, diminishing its cushion of reserves to $46.4 billion by Dec. 31 from a record $50.5 billion on March 27. Excluding loans from the Bank of International Settlements and other lenders, net reserves fell even more -- to $40.6 billion, Credit Suisse Group economist Carola Sandy estimates.

Reserves also slid as commodity prices plunged 50 percent from a July record, according to the UBS Bloomberg CMCI Index. Soybeans, Argentina’s top agricultural export, fell 41 percent as the global financial crisis curbed demand. Commodity export taxes -- as high as 35 percent for soybeans -- helped fill government coffers and bolster bank deposits.

Prim’s factory, which employs 140, reduced extra work orders and moved forward annual vacations as monthly production dropped to 100 metric tons from 140 metric tons. Until October, his company exported about 20 percent to Brazil; by November, exports fell to zero, Prim said.

Argentina’s overall exports fell on a yearly basis in November for the first time in six years, according to the latest trade data from the government.

‘Unavoidable’ Pressures

Brazil’s economy may grow as little as 1.5 percent this year, less than a third the pace of last year, according to Itau Corretora de Valores SA, the brokerage unit of the nation’s biggest bank. Gross domestic product expanded 5.6 percent in 2008, according to a central bank survey of about 100 economists released Jan. 5.

Argentina’s economy, meanwhile, may shrink 0.9 percent this year after expanding 6.5 percent in 2008, according to the median estimate of eight economists surveyed by Bloomberg. The economy expanded more than 8 percent every year from 2003 to 2007.

“The peso has nowhere to go but down,” said Win Thin, a senior foreign-exchange strategist at Brown Brothers Harriman & Co. in New York. He predicts it will end the year as weak as 4 per dollar. “The central bank is trying to control the pace of weakness, but the pressures are unavoidable.”

To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net