Can Argentina really switch from peso to dollar?

By Chicago 7 Min Read

London CNN –

Javier Milei won the one for Argentina Presidential Elections Sunday with a ticket to review the economy no. 2 of South America and abandon it currency of weight in favor of the US dollar.

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Milei’s La Libertad Avanza coalition won the election with nearly 56% of the vote, defeating the incumbent center-left Peronist party and its candidate, Economy Minister Sergio Massa.

In his victory speech on Sunday, Milei provided few details about the economic policies he plans to adopt when he takes office on Dec. 10. But the self-proclaimed “anarcho-capitalist” – who brandished a chainsaw during the election campaign to symbolize his plans to cut state spending – promised “drastic” reforms.

“The model of decadence is over, there is no going back,” Milei declared.

“Today we put an end to the ever-present destructive model of the state, which benefits only a few while the majority of Argentina suffers,” he added, also acknowledging the challenges it faces.

“We have enormous problems ahead of us: inflation, economic stagnation, lack of real employment, insecurity, poverty and destitution.”

Financial markets have largely welcomed Milei’s victory, which is likely to usher in victory a sea change in the definition of economic policies. Milei must facing inflation above 140%, a shortage of foreign exchange reserves and the prospect of another painful recession.

Argentine dollar bonds rose Monday, while New York-listed shares of several Argentine companies rose. State energy company YPF (YPF) jumped 40% and banks Banco Macro (BMA) and Grupo Financiero Galizia (GGAL) gained 20%.

Argentina’s financial markets are closed for local holidays, but the peso weakened slightly in partial trade to settle around 353.58 against the US dollar. The value of the currency has plummeted 875% against the dollar over the past five years.

Milei has pledged to remove currency controls and import restrictions, which analysts say would put even more pressure on the peso, bringing the currency’s value closer to the levels at which it trades on various informal markets.

Bruno Gennari, Argentina expert at fixed income broker KNG Securities, said the peso was trading at $1,009 against the dollar on cryptocurrency exchanges on Monday, significantly weaker than the $869 and $975 rates seen on Friday.

A former economist and TV pundit running for president on the promise of “breaking the status quo,” Milei has made Argentina’s “dollarization” a campaign promise, hailing it as a cure for the country’s health. problem of hyperinflation.

It’s a step other countries have taken, but none on the scale of Argentina, Latin America’s third-largest economy after Brazil and Mexico.

Dollarization means Argentina would give up the peso and use the U.S. dollar as its currency, effectively wresting control of monetary policy from the country’s central bank and handing it over to the United States Federal Reserve.

The move would also deprive Argentina’s central bank of the ability to print money – a tactic it has often employed to help the country’s spendthrift government avoid defaulting on its debts. This, in turn, has fueled rampant price increases.

Javier Milei gives a speech after his victory over Sergio Massa, Minister of Economy and presidential candidate of the ruling Peronist party.

Analysts agree thatdollarization would help tame the situation inflation. But they doubt whether Milei has the political or popular support to pursue this agenda.

“We suspect that some of his more radical proposals – namely dollarization – may not materialize, given limited support both in Congress and among the public,” William Jackson, chief emerging markets economist at Capital Economics, wrote in a note Monday .

Whiledollarization “would be a surefire way to keep inflation under control, it would not be a solution to the country’s fiscal problems,” he added.

In a sign that he may be trying to win support from centrist parties, Milei did not mention dollarization or previously discussed plans to close the central bank in his victory speech.

“It won’t happen in the short term,” says Thierry Larose, portfolio manager at Vontobel Asset Management in Zurich. Political obstacles aside, the fragile state of Argentina’s economy leaves it in no position todollarize, he said. he told CNN, describing it as a “terrible idea.”

This is because, as things currently stand, the conversion rate would be highly unfavorable for the peso, drastically weakening the currency and likely leading to an increase in poverty, which according to government data is around 40%.

“If you want todollarize at a conversion rate that makes social and economic sense, you need a minimum amount ofinternational reserves,” Larose said. Currently, the government’s foreign exchange reserves are in the red by more than $10 billion.

The “path todollarization,” however, could benefit the economy, Larose added.

“Todollarize… you need to stabilize (the economy): eliminate hyperinflation, rebuild foreign exchange reserves,” he said. “Fiscal consolidation and ultimately access to capital markets is needed.”

It may still be a long way off. The International Monetary Fund (IMF) has effectively prevented Argentina from accessing international markets while the country would repay its debts. Argentina owes Washington DC-based lender around $44 billion following historic event rescue in 2018.

Kristalina Georgieva, the fund’s CEO, congratulated Milei on his election victory on Monday. “We look forward to working closely with him and his administration in the period ahead to develop and implement a strong plan to safeguard macroeconomic stability and strengthen inclusive growth for all Argentines,” she said. he wrote on X, the platform formerly known as Twitter.

Milei will need all the help she can get. The World Bank expects Argentina’s economy to contract by 2.5% in 2023, partly due to a devastating drought that is estimated to cost it $20 billion in lost agricultural exports.

Furthermore, Capital Economics’ Jackson expects the IMF to “back away” from its recent leniency towards Argentina. “It’s not clear whether debt restructuring will be required at this point, but we are moving in that direction,” he said.

— Valentina Gonzalez, Stefano Pozzebon, Olesya Dmitracova and Reuters contributed to this report.

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