What’s next for Argentina?

by Jul 29, 2020Market Reviews

What’s next for the Argentina?

Over the past year, the Argentinian Peso has last 20.3% against the US dollar. A combination of spiraling government debt, political unrest, and the Coronavirus have seen Argentina fall further into recession.

USD/ARS

The deprecation of the Argentinian Peso came when the government defaulted on their debt for the 9th time – three times being in this century alone. The country officially defaulted on their debt on May 22nd, when it missed a $503 Million interest payment. Argentina’s President, Alberto Fernandez, said they wouldn’t be able to resume payments to the IMF for another five years. Currently, Argentina has a debt burden of $323 Billion at the end of 2019, which is equivalent to 88% of the country’s GDP.

Alongside this, political instability and the Coronavirus have to lead the Argentinian Peso lower. There are concerns that hyperinflation will ensue in Argentina, similar to what has happened in Venezuela.

Drawing lessons from Venezuela

The poster child for Hyperinflation, Venezuela’s fall came swift as a boom in oil prices influenced government policy. Prices from 2010-2014 were in the $100 range for Brent Crude, and Venezuela decided to fund their social systems to combat poverty and inequality. However, prices in 2015 plummeted to $50, and the Venezuelan could not pay for their social services. Furthermore, similar to how the Australia dollar is vaguely correlated to the commodities it exports, the Venezuelan Bolivar plummeted as oil exports accounted for 90% of the government’s revenues.

To pay for their social welfare system, the President at the time, Nicolas Madura, decided that the solution was to print more money, increasing the supply of the Bolovair in the market. It was not the solution. This caused rapid inflation in the country. In attempts to reduce this, Madura decided to make it more difficult to exchange the Bolovair into the US. However, in the Black Market, it US dollar was still being freely traded. By 2018, the exchange rate for the 1 USD was 250,000 Bolivares. But by the end of the year, the government decided to devalue the official rate to the black market rate, sending the official value of the Bolivar down 95%. Inflation reached a peak of 130,000% in 2018.

Argentina, while no technically at hyperinflation, might as well have their inflation numbers be rendered useless.

Currently, inflation in Argentina sits at around 53.8%. While Argentina does not have the same problem as Venezuela (dependent on a sole export), they have seen an increase in selling for the Argentinian Peso as institutional investors sell and devalue the country’s bonds. Currently, the Peso is “free-floating,” however, the government has imposed strict restrictions and steep taxes on officially exchanging the currency. However, just like Venezuela, there is a black market for the US dollar, which trades at a steep discount compared to the official rate. Currently, the official exchange rate is 72 Pesos for 1 USD Dollar. However, the exchange rate on the Black Market is around 120 pesos for 1 US Dollar. There may be a possibility that the Argentinian government devalues the currency, like what the Venezuelan government did.

However, this was not Argentina’s first rodeo with inflation.

Pre 2002, the Argentine government was battling inflation problems and social and political unrest, like what is currently happening in Argentina. However, back then, a Peg was implemented to the US dollar. Once they abandoned the Peg in 2002, the value of the US dollar against the Peso skyrocketed 400%. The nation has been battling with inflation since the 1970’s, where the government decided to increase the money supply by printing money, similar to Venezuela. The average inflation between 1975 and 1990 became 300%.

So, we can draw similarities between what happened in Venezuela and what is currently happening to Argentina. If we see the Argentinian government devalue the currency to actual market value, we may see the USD/ARS skyrocket and inflation go rampant in Argentina.

 

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