Argentina’s central bank estimated in 2020 that Argentinians hold $170 billion of US dollars in cash within the country, equivalent to ten percent of all dollars in existence.
Perhaps nothing sums up a failing currency like the thirst for dollars. I put together an analysis last year on how the dollar is the world’s reserve currency. For Argentinians, it has become a lifeline, if they can get their hands on it.
Looking at the official exchange rate (which is far from the fair market, but more on that in a moment), 229 Argentinian pesos will currently net you one American dollar. 20 years ago, that same dollar would have cost only 2.9 pesos, a devaluation of 98.7%.
In reality, however, the situation is worse. Nothing sums up a collapsing currency like the existence of multiple exchange rates. In Argentina, the official rate mentioned above is not dictated by market demand, but rather it is artificially pegged. Capital controls are restrictive: natives have only been able to buy $200 per month at the official rate (this includes imports from abroad).
The “true” rate is the black market rate. In recent times, nearly double the pesos are attainable through this avenue compared to the official rate. One dollar currently nets you 470 pesos, translating to a devaluation of 99.4% over the past 20 years.
The crisis is seemingly getting deeper by the day in the Latin American country, with the peso losing half its value since the start of the year. It is easy to forget that at the beginning of the 20th century, Argentina was among the richest countries in the world, a remarkable juxtaposition to the economic chaos the nation is currently enduring.
The problems with the currency are exacerbated by a pernicious drought. Argentina is the world’s top exporter of processed soy, but the drought and concerns about the devaluing currency has led farmers to hold onto the low stock. The government even introduced a preferential exchange rate for producers to help spur exports, but such is the rapid pace of the peso’s demise that it has failed to make a difference.
“The scant income of agriculture has forced the central bank (BCRA) to intervene as it had been doing prior to the launch of the ‘soybean’ dollar,” local consultancy Portfolio Personal Inversiones said in a note to Reuters last month.
“The stock (of BCRA reserves) is so small that it cannot withstand negative flows of this magnitude for many more days. According to our estimates, net reserves closed yesterday at $679 million, the lowest since March 2022,” it added.
Last month, inflation hit a staggering 104% on an annual basis. This forced the central bank to hike rates 300 bps, the reference rate now 81%. This is, quite literally, monetary collapse.
Can the peso be saved?
The failure of the government’s initiative to introduce a preferential rate for producers, and the desperately high interest rates, highlights what everybody already knows: it is hard to stop a moving train.
Nobody wants to hold pesos, which increases the selling pressure of those same pesos, and which strengthens the determination of people not to hold pesos even further, and we get a vicious cycle that is tough to stop. With houses, cars and other large items already priced in dollars, the prospect of Argentina becoming the latest Latin American country to be dollarised inches closer and closer by the day.
As the currency collapse accelerates, the impact on the economy worsens. Merchants reduce items available for sale, building up inventories. Dollars under mattresses are commonplace (and in this ilk, reports of Argentinians using cryptocurrencies are not surprising). Reports are commonplace of people rushing to buy canned food and other durable foods as soon as paycheques arrive.
Remember that stat about $170 billion US dollars in cash residing in Argentina? That shows that, in a way, the country is already dollarised. Swapping your dollars into pesos to purchase real goods as soon as possible, and swapping your paycheque into dollars at the cheapest rate possible, is just part of daily life in Argentina.
If you research what to do ahead of a visit to the country, the number one advice is to come armed with US dollars in cash, and avoid official exchange venues. People have learned to save in US dollars. For all intents and purposes, Argentina is a dollarised country. It just hasn’t been made official yet.
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