Without pesos: where will dollarization lead Argentina | November 21, 2023

Source: Reuters

Policy Argentina’s new President Javier Miley could drive the country into another default and deep economic crisis. The idea of ​​abandoning the national currency in favor of the US dollar might have worked if not for the massive government debt and unstable trade balance.

In 2022, Argentina had a trade surplus of about $6.92 billion. However, the current account was in deficit at $4.29 billion. At first glance, it may seem that everything is favorable to pegging the peso to the dollar, or completely replacing the domestic money supply to American currency. However, 2022 was a very successful year against the backdrop of high food prices.

Statistics for other years show not so positive indicators.

Only countries with a stable positive balance of foreign trade can ensure that their currency is pegged to the American one. These, for example, include the UAE, Saudi Arabia, and other Arab countries of the Persian Gulf that sell oil on the world market.

Argentina is not one of the countries with stable income from foreign trade. Food prices are very volatile, which means that profits from the sale of such products are not sustainable. There was a trade surplus between 2019 and 2021. Before this, there was a deficit in 2017-2018. In general, we can say that the situation with foreign trade is not so depressing, but it is clearly not favorable.

In addition, servicing external debt eats up a significant portion of income. In 2019, the maximum for this indicator was reached at $283.1 billion. In June 2023, the volume of external debt decreased to $276.2 billion. That is, there is a slow decline in the debt burden, but there is still a long way to go. To clarify, Argentina’s GDP is estimated at about $150.8 billion.

The transition to the American dollar will in no way relieve debt, but will negatively affect the state’s ability to influence the economy. In essence, rates in the US will become rates in Argentina, but taking into account domestic risk, they will be noticeably higher.

Plus, the economic cycles in the US and Argentina may not coincide. As a result, there will be a sharp increase in the risks of imbalance of internal cash flows.

Another source of problems in the transition to US dollars may be disruption of trade with key partners. In particular, Javier Miley outlined a course towards reducing relations with China. However, China is one of Argentina’s main importers and one of the key sources of investment. We are no longer talking about the less significant role of the Russian Federation, which also has a certain interest in imports from Argentina. Accordingly, the loss of previous trading partners will worsen the trade balance, and with a deficit current account, this will only create a shortage of dollars in the domestic economy and a new wave of crisis.

Therefore, the populist statements of the new President of Argentina are far from the real possibilities of the country, and are even extremely destructive.

“This information is for informational purposes only and does not constitute an individual investment recommendation.”

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