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OPINION AND ANALYSIS | 26-04-2023 15:49

Argentina's parallel currency slides as cracks widen

The country will hold elections later this year. Whoever wins will inherit an economic disaster.

Argentina boasts more and more exchange rates (as did Venezuela). There is even a special one for buying wine. But what they can't disguise is what is happening to the peso – Argentina is holding on tooth and nail and the tension is showing in the currency.

Recent weeks have shown the weakening of the contado con liquidación exchange rate, which measures the ratio between dollar and peso-denominated shares of Argentine firms to generate a market-determined exchange rate. The official exchange rate is tightly controlled.

Prices more than doubled in February from a year earlier, the first time in 30 years that inflation has exceeded 100 percent, while an unprecedented drought stifles growth in a country dependent on agricultural exports. Argentina's inflationary mess is a symptom of its idiosyncratic policy mix, which in turn is a result of its political dysfunction.

While commentators in the developed world fret about the Federal Reserve's struggle to control inflation, orthodox economics essentially solved the problem of how to curb inflation decades ago (generating it is a bit more difficult, as the European Central Bank and the Bank of Japan can attest). Latin American countries that have adopted central bank independence, inflation targeting, monetary policy rates and monetary flexibility have succeeded in overcoming hyperinflation. And although it resurfaced after the pandemic, few doubt that they will get it back under control.

Argentina, for its part, pursues a policy mix that includes expanding the money supply, running a high deficit and financing public spending through the Central Bank. It then intervenes to prop up a currency that depreciates because of the same policy mix. It didn't work before and it doesn't work now. The country conducted a brief experiment with conventional inflation targeting, but it failed after the Central Bank caved in December 2017 to government pressure and raised its inflation target (I welcomed it at the time as a concession to reality, but I was wrong: it further undermined the bank's credibility).

The country will hold elections later this year. Whoever wins will inherit an economic disaster. The opposition should be well positioned, but has yet to define a candidate: former security minister Patricia Bullrich and Buenos Aires City Mayor Horacio Rodríguez Larreta are leading the polls. Meanwhile, Javier Milei, a Donald Trump-inspired outsider, seems well positioned to benefit from the electorate's anger against the political class.

by Sebastian Boyd, Bloomberg


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