There are a variety of studies that confirm that Argentina changes its currency on average every 29 years (Sticco, 2020). The last time was in 1991 with the enactment of the Convertibility. That is, statistically we are in times of profound structural changes in monetary matters in Argentina. Let’s go to the reasons:
1) “Indestructible” structural inflation
In economics, there are points of “no return”. Argentina at the monetary, inflationary level is at the point of no return, that is, the structural inflation of the last years 2016-2022 higher than 45% indicates that the problem is so serious that without “shocks” or drastic changes in policy monetary, the chances of correcting this evil became impossible. Projected inflation in 2022 exceeds 48% by most banks and private entities in the market, without considering an accelerated devaluation of the official exchange rate.
Ecuador is an interesting example to analyze since pre-dollarization structural inflation had reached a point of no return. We see how a 4-year impasse is generated, but then inflation returns to the spiraling path, with the explosion of 2000.
2) The ineffectiveness of the “little machine” to win elections
We are not going to discuss whether or not issuing generates inflation, because despite the fact that in 2020 governors and ministers confirmed that there was no direct relationship, inflation in 2021 is projected well above the official 29%, approaching 46%.
Nevertheless, What is dramatic for a certain political class is that “putting pesos” in one’s pocket does not give the desired electoral results. Recall that in 2020 7.4% of GDP was issued to finance the covid crisis and the real economy fell 9.9%. Therefore, the effectiveness not only economic but political is increasingly questionable. Regrettably, the issuance in Argentina will continue, strongly devaluing our currency (prolonged devaluation) and there will be greater inflationary flashes in the next 12 months.
According to Brenta (2002) and Paredes (2019), hyperinflation “is the best prelude to the introduction of deep structural reforms, since it destroys the domestic currency and the relative price system, raising uncertainty about decision-making to such degrees. that the entire economy is paralyzed and the agents understand that it is necessary to establish new rules of the game, accepting to assume certain costs “
3) Dollarized country: the peso has already lost its battle
Argentina is dollarized at the “stock” level since Argentines with the ability to save invest in dollarized assets (real estate), buy dollars to store or import products from abroad. At no level is the peso discussed as a store of value since its volatility and rising inflation only further deteriorate its credibility. According to figures from the current president of the BCRA “Argentines have “under the mattress” about US $ 100,000 million, while they hoard another US $ 400,000 million in foreign accounts “, In other words, there is practically a GDP abroad that does not want to coexist with the dynamics of bimonetarism and chooses the dollar as a refuge of value.
4) The external black swan
After the overwhelming monetary issue and sustained increase in public spending in the last 10 years by the United States government, a new post-pandemic cycle begins. The monetary reorganization will have consequences for weak economies such as Argentina. Let us remember that one of the main causes of the exchange run in 2018 was linked to the possible rise in rates from the FED. Again, Argentina will face this scenario, which materialized with capital outflows, currency devaluation and therefore higher inflation. Likewise, a rate hike will condition the value of commodities, where we will probably not see the values of 600 usd per ton that we saw in 2020/2021, affecting Argentina’s fiscal front.
In conclusion, there are different reasons that explain the further weakening and subsequent elimination of the peso as legal tender in Argentina. It only remains to know when, how and what currency we Argentines will adopt soon.
The author is director of Romano Group, director of the Diploma in Capital Markets at the Austral University and a master’s degree in Finance and Public Policy (Columbia University) Web: www.alfredoromano.com