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Argentina's Financial Market Reacts to Milei's Election

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BNN Correspondents
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Argentina's Financial Market Reacts to Milei's Election

Following the election of Javier Milei, Argentina's President-elect, there has been a significant shift in the nation's financial market. Milei, who is currently on a tour in the United States, has been meeting with U.S officials and the International Monetary Fund. Within Argentina, the unofficial 'blue' dollar rate experienced a decrease, falling by ARS 5 to close at ARS 990 on Monday. Additionally, the financial 'dollar' rates, used for stock exchange operations and other financial mechanisms, witnessed a considerable drop. The MEP or 'stock exchange dollar' fell by 9% to ARS 889, and the 'cash with liquidation' (CCL), favored by companies for dollarizing their operations, dropped by 7% to ARS 859. This declining trend was also reflected in the gap between the CCL and the future dollar, decreasing from 45% to 13%.

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Anticipations Following Milei's Assumption

There are market anticipations that the official dollar, which currently stands at ARS 359, could experience a significant surge following Milei's assumption on December 10. The market expects the exchange rate gap, currently at 176% between the wholesale dollar and the blue dollar and 139% between the official and the CCL, to decrease drastically.

Argentina's Economic Cycle

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To comprehend Argentina's cycle of economic crises, tracing the history of Peronism from its original goal to deviate from the nation's largely agriculture-based economy and towards industrialization is helpful. The enactment of these policies between 1946 and 1955 increased Argentina's budget deficits, its external debt, and balance of payments vulnerabilities, setting the stage for future boom and bust cycles.

Milei's Plan for Dollarization

Milei has admitted that dollarization will not happen immediately, perhaps realizing that shutting down the central bank and officially adopting the dollar as Argentina's currency would require constitutional changes. Reports suggest that dollarization is now a 'medium-term' goal, rather than an immediate priority. Despite US dollars being ubiquitous in Argentina, dollarization can be difficult. It's not just about adopting a new currency, it's about adopting a new currency and retaining a reasonable value for the old one.

The Way Forward

A more practical plan would be to borrow a considerable amount of money, stabilize Argentina's fiscal position through a mix of tax hikes and spending cuts, and promise to convert pesos into dollars at a fixed rate. This is essentially how Ecuador dollarized in 2000, and it has stuck. However, some major problems lie ahead. The IMF does not generally favor dollarization, and is unlikely to lend to Argentina for that purpose. Another question is how to choose a rate of conversion for pesos to dollars. If the government were to peg the peso too high, there would be deflationary pressures, which would likely harm the economy. Alternatively, if the government pegged the peso too low to the dollar, there would be even more inflation in the short run, as people would be all the more inclined to unload their pesos.

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