After a surprise primary victory, the Argentinian peso fell 20% against the dollar. This is the opposite approach that most countries are seeing as they attempt to move away from using the dollar, but Milei wants to make the U.S. dollar Argentina’s national currency.
What’s happening:
Javier Milei, a Libertarian economist, received 30% of the vote in the presidential primary. Argentina’s primary is between all presidential candidates from all parties. Milei was never the frontrunner, but he pulled out an unexpected victory. Milei is a member of the Freedom Advances political party and has been compared to former U.S. President Donald Trump and former Brazilian President Jair Bolsonaro because he advocates for minimal state intervention in the economy. Argentina has faced severe inflation rates for the past few years and Milei’s plan to combat this issue for the Argentinian people is to switch to using the U.S. dollar as the main currency.
Why is this happening:
Argentina’s economy was impacted by the global pandemic and the country’s default, both of which made life worse for the Argentinian people financially. To solve the problem of not having enough money to help its people and pay off its debt, the government started printing more money which led to higher inflation levels. The pesos printed were to help finance cash contributions and salary programs during the pandemic, which increased spending at the risk of inflation increasing. Milei won the primary and his platform plans to make the U.S. dollar Argentina’s currency. The Argentine peso falling against the dollar was the first indication of what would happen if his plan were to be executed.
What could happen next:
The central bank will boost the benchmark’s interest rate from 97% to 118%. The result of this will continue to devalue the Argentine peso relative to other currencies. On August 14th, the peso plunged 18% to 350 pesos per dollar. This will supposedly be the fixed exchange rate until the October presidential vote. This will help with Milei’s campaign as Argentina’s current currency is being devalued, which hurts the citizens who use the currency daily. If Milei is elected, then he could switch the country to relying on the dollar, which is a more reliable currency.
Back in 2022, the International Monetary Fund rescued Argentina by extending their agreement by 30 months. The agreement is equivalent to $44 billion. The IMF has had to bail out Argentina 22 times as of 2022. Argentina started a swap line with China to gain access to the yuan under the current President Alberto Fernández; however, Milei thinks that Argentina should form a strong alliance with the United States and that loyalty can be shown through adopting the dollar as its currency. He also hopes that the dollar will help to stabilize Argentina’s economy.
If Milei gets elected in November, this will likely lead to a further decline of the peso as Argentina converts its currency to the U.S. dollar. Milei will likely want to have this take effect as soon as possible if he wins. This will be a unique approach as the current trend shows countries moving away from relying on the dollar.
Argentina is also a contender to be part of the expansion of the BRICS alliance. By joining the alliance, Argentina would be encouraged to rely less on the dollar. This is aligned with the current president’s viewpoints, but not with Milei, who is now second in the polls. Argentina has the seventh-highest inflation rate in the world as of July 2023, so there is a desire to decrease inflation rates. If Milei does win, it will be interesting to see how the currency used by Argentina will be selected, especially if they become BRICS members during the upcoming August summit before the presidential election in October.
Business leaders should continue to follow this situation with Argentina as it could affect how they trade depending on how much it continues to rely on the dollar. If Milei wins, then the U.S. dollar’s stability should increase as it will likely help bring Argentina out of struggling economic times.
Sources:
- https://www.reuters.com/markets/currencies/argentina-raises-interest-rate-devalues-peso-after-shock-primary-election-2023-08-14/
- https://internationalbanker.com/finance/why-inflation-in-argentina-is-above-100-percent/#:~:text=With%20access%20to%20finance%20severely,pushed%20to%20even%20higher%20levels.
- https://www.washingtonpost.com/world/2023/08/14/javier-milei-argentina-presidential-election/
- https://www.reuters.com/markets/currencies/argentina-raises-interest-rate-devalues-peso-after-shock-primary-election-2023-08-14/
- https://ca.sports.yahoo.com/news/argentinas-peso-sinks-presidential-candidate-000406080.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAJUFDmskMEIFQLZbbETpjRl2KrMPlUcvqxsBTHqYMpS1tyTdhKwXCQNDJ29ZjeurJp4KPzkQmC3M-fNl6c5Vem4lWxj3_R8T_DG4D49y5kDci52yBqGwOgsGwT3XqEsEWGD6H6k7Wto2kMx-fCF-3aJZ5IbPQHGZrGvHTR-japrW
- https://smarkets.com/event/42891901/politics/world/2024/01/01/00-00/argentina/2023/10/29/22-00/2023-argentinian-presidential-election?lang=en-US
- https://www.reuters.com/markets/argentina-markets-face-election-hangover-after-far-right-primary-bombshell-2023-08-14/
- https://www.infoplease.com/world/economic-statistics/highest-inflation
- https://www.imf.org/en/News/Articles/2022/03/25/pr2289-argentina-imf-exec-board-approves-extended-arrangement-concludes-2022-article-iv-consultation
