Javier Milei wants Argentina to convert the peso to the US dollar. Here's what it could mean
The self-described chainsaw-wielding "anarcho-capitalist" is now poised to restructure Argentina's crumbling economy by abandoning the country's peso and adopting the U.S. dollar as legal currency.
Far-right libertarian presidential candidate Javier Milei has made Argentina's "dollarization" a key proposal of his campaign, touting it as a solution to the country's hyperinflation problem. This is a measure that other countries have adopted, but not like Argentina.
Milei, a former financial analyst, came second in Sunday's first round of voting behind Sergio Massa, Argentina's current left-wing economy minister. The two candidates are expected to face off in a runoff election next month.
Perhaps he will now try to win centrist support by moderating his stance on the economy. Analysts at JP Morgan noted that he did not use the word “dollarization” in his speech on Sunday. However, markets will be tense as they expect the race to be close. For years,
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Argentinians have preferred to pay for many goods and services in dollars rather than with their own crisis currency on the informal “Blue Dollar” foreign exchange market.
The value of the peso has fallen 858% against the U.S. dollar over the past five years as the central bank has printed more money to help the country's spendthrift government avoid defaulting on its debts.Which in turn caused prices to skyrocket.
According to the National Institute of Statistics and Census, the annual inflation rate reached 138% in September, the highest level in 32 years.
However, full and formal dollarization would take the economy into completely uncharted territory. According to analysts, this would also be a daunting task.
“Here lies Argentina's problem in eliminating its fiscal deficit: It turns on the central bank's copier and starts printing money,” Christopher Sabatini, senior fellow for Latin America, told CNN at Chatham House, adding that dollarization “is achieved through fiscal discipline is forced”. "and thus helps curb inflation. An August report from
economists at Capital Economics found that the dollar-denominated countries of El Salvador, Panama and Ecuador have "significantly lower inflation than elsewhere in the region."
Kimberley Sperfechter, emerging market economist at Capital Economics, believes dollarizing Argentina would have minimal impact on the United States because it is a "relatively small player" in global trade.
"(Argentina's) economy is relatively closed," he told CNN. “There are capital controls so it is difficult to take money out of the country.
Analysts say it is not a “silver bullet”
. However, dollarization is not a panacea for Argentina's ailing economy.“(This policy) is seen as some kind of silver bullet that will solve all of Argentina's problems, but in my opinion it is simply wrong,” Sperfechter said. “Fiscal policy remains the responsibility of politicians,” he added.
While the dollar economy would likely be protected from rising inflation and falling currencies, Capital Economics noted, it would become more vulnerable to a process known as "internal devaluation."
Because Argentina would lose control of its exchange rate, it would be unable to absorb shocks to its economy by devaluing its currency.On the contrary: in order to stabilize the economy and remain competitive on export markets, domestic wages and prices should be reduced.
Dollarization, even if it stops inflation, is no guarantee that bankruptcies will not occur. Ecuador - a fifth of Argentina's $622 billion economy - has defaulted twice since adopting the dollar in 2000.
A Practical Puzzle
There is another significant obstacle to Milea's plan: Argentina does not have enough dollars to abandon the peso.
According to Capital Economics, Argentina has a $7.5 billion hole in its foreign reserves, meaning it holds fewer dollars than it owes to its creditors abroad.
“The central bank doesn't have enough dollars. They're just not there.It still owes (International M.) $44 billion in debt
It would probably be difficult for the government to raise money through other means.
The IMF effectively blocked Argentina's access to international markets until it repaid its debts, Sabatini explained. The government should also persuade its citizens at home and abroad to return their pesos en masse, he explained, and do so calmly to avoid "a wave of speculation" that would further destroy the value of the local currency.
“People would be forced to take wheelbarrows full of cash and exchange it for dollars,” Sabatini said. “The sheer complexity of what (Milei) presents as an idea…is difficult to imagine on a practical level.»
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