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The Argentine economy is no stranger to economic crises. The country saw a massive financial crisis with the currency almost collapsing in the year 2001. Now, seventeen years later, Argentina seems to be back to square one.
Once again, the inflation rates in this Latin American nation have started skyrocketing. Also, the declining value of their currency is causing a lot of inconvenience and loss to the people of Argentina.
In the first week on May 2018, the interest rates in Argentina had to be hiked to 40%. This was a desperate attempt to convince depositors to let their money remain in the banking system.
Otherwise, the inflation rate of the nation is over 25%. As a result, savings do not make sense. The average citizen of Argentina wants to spend their money as soon as possible before it loses value.
The foreign exchange rates of many currencies have been stricken in the past few days. The dollar has suddenly strengthened.
As a result, investors are taking money out of emerging markets and back to the United States. This has had a detrimental effect on many small Latin American economies.
Argentina has seen the value of its currency decline about 20% since January. In January 18.6 pesos could be exchanged for one dollar. However, now 23 pesos are required to obtain one dollar.
The strengthening of the greenback is only a catalyst that has set a crisis in motion. The peso has been seeing a steady decline for a long time now. This is because of the poor monetary policy being followed by Argentina.
The nation has been running both trade as well as budget deficits for a very long time now. The country also faces a significant amount of external debt which makes its situation even more vulnerable.
Many analysts were predicting a crisis for the Argentine economy. However, the speed with which the crisis has escalated has startled many. Within a span of just seven days, Argentina had to raise its interest rates three times in order to prevent a total collapse of the economy.
The government has decided to keep the interest rate stable at 40% in its bi-weekly meeting. Foreign investors are afraid that the Argentine economy is once again heading for disaster.
Hence, unless the government takes some drastic steps, the confidence in the nation’s economy is unlikely to be restored.
The current Argentine crisis has come as a surprise to many. This is because current President Mauricio Macri seems to have done everything right. He has taken steps to make Argentina friendlier to foreign investors.
The end result has been the fact that investors have poured billions of dollars in the equity as well as debt markets in Argentina.
However, the Macri government has also dismantled the foreign exchange controls in Argentina. The peso is now freely convertible to other currencies. Many critics believe that Macri may have gone too far with liberalization.
This is because the current crisis is being caused by the sudden plunge in the market value of the peso. This could have been avoided had the peso been regulated. Right now, the government has no tools to defend itself from the onslaught of the foreign exchange market.
Many critics have been clamoring that Macri needs to bring back capital controls with immediate effect. However, such a result seems unlikely.
This is because dismantling of capital controls and a freely floating peso were a crucial part of Macri’s election promises. Going back would be an admission of wrongdoing which could cause grave damage to Macri’s political ambitions.
Mauricio Macri has asked the IMF to arrange for a standby fund. This fund will be like an overdraft that Argentina will only take if they run out of money. This move has not gone down well with the Argentinian population.
Most Argentinians believe that the IMF was largely responsible for a massive recession that the country faced from 1998 to 2002. The common belief in Argentina is that IMF is a usurious institution which imposes many limitations on the policies of the government.
Such restrictions negatively affect the sovereignty of the nation taking aid from the IMF. This move is likely to be very unpopular. However, Macri seems to be running out of options.
Meanwhile, the socialists in Latin America are taking this as an opportunity to instigate hatred against the capitalist system. They are projecting Macri to be a crony of Western capitalists. If the situation in Argentina is not controlled with immediate effect, it is likely that a socialist government will take over. Years of market reforms undertaken by Macri and his party may be overturned instantaneously.
At the present moment, Argentina needs economic help. The country has abundant natural resources and a very vibrant workforce. It is essential that the United States and IMF do not offer onerous terms to bail out the nation.
Favorable conditions will send right signals to the general population. Over time, this will help the nation transition to a completely market-based economy.
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What the Current Wave of Protectionism and Populism mean for the Future of Globalization and Free Trade
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