The far-right Milei – who calls itself an ‘anarcho-capitalist’ – is trying to help the ailing Argentine economy get back on its feet with this measure. How does he think devaluing the currency will help, and can he just do that? Five questions and answers.
What exactly does the Argentine government do?
The Argentine Minister of Economy Luis Caputo announced the devaluation of the peso the day before yesterday. Argentinians now pay about 395 pesos for one euro, which will soon become slightly more than 800. On top of that, the central bank is aiming for a monthly depreciation of 2 percent.
The measure that Caputo announced is accompanied by significant cuts. Public tenders, for example for infrastructure, will be cancelled, some government jobs will disappear and subsidies will be cut.
Why is the Argentinian government doing this?
To understand this, it is good to take a look at the graph above. “If you do business with the Argentine government, you pay the official rate. But on the black market you pay something different,” says RTL Z stock commentator Durk Veenstra. “In fact, this is an adjustment to reality.” In fact, even after the peso is halved in value, the Argentine currency is worth even less on the black market.
Argentina has been struggling with hyperinflation for years, at around 140 percent per year. Four in ten Argentines also live in poverty. Making the peso cheaper will make it more expensive for Argentinians to import products, but will actually stimulate exports. The idea is that this should curb inflation.
Although the revaluation of the peso is the most striking measure, it cannot be seen separately from the announced cuts. By cutting subsidies and government spending, less money enters the Argentine economy. This is not only good for government finances, it also creates scarcity, which means the peso should become more valuable.
What are the effects of this?
The goal is therefore to stop hyperinflation, but in the short term the opposite will happen, warns Argentine Economy Minister Caputo. This is because imported products instantly become twice as expensive. In the long term, inflation should stabilize through devaluation and austerity.
Professor of Latin American Studies Michiel Baud is convinced that the cuts will have more effect than the devaluation. “Many Argentinians don’t have dollars, so they won’t notice it. But the cuts will come into effect on Monday, and then metro tickets, for example, will suddenly be more expensive.”
In any case, it will take some time for the average Argentine to ‘bite through the sour apple’, Baud thinks. The hope is that the positive effects of the measures will be noticeable soon enough. “If this is not done in time, the unions will soon be ready to protest. Then this experiment could degenerate into chaos,” says Baud.
Because positive effects are certainly conceivable. Argentina mainly exports agricultural products, and those products become a lot cheaper for other countries to import. This is due to the devaluation of the peso, but also because the government of Milei wants to abolish export taxes on these products.
In addition, the cuts, however painful, still seem to be necessary. Argentina has been teetering on the brink of bankruptcy for decades, and had to be rescued several times by the International Monetary Fund (IMF). He therefore welcomes the ‘bold’ new measures.
“My assessment is that you will only be able to see in February where the successes and problems of this policy lie,” says Baud.
Can a government simply halve the value of its own currency?
The short answer is yes, says stock market commentator Veenstra: “Who is the boss of a currency? That is in fact the government, together with the central bank.” Moreover, the official value of the coin only comes closer to the market price, Veenstra explains. This makes it likely that the revaluation will be accepted by financial markets and Argentine society.
Didn’t Milei want to get rid of the peso completely?
That was indeed an election promise of the libertarian politician. So much is already paid in dollars in Argentina that you might as well officially introduce the American currency, or so the reasoning was. Yet this could just be an empty promise, Baud thinks. After all, to introduce the US dollar you have to buy all the Argentine pesos, and it is unclear how Argentina gets enough dollars to do that.
Veenstra also sees that Milei’s policy is a lot less extreme than the image that emerged in the election: “A devaluation is actually a very classic medicine for economically weak countries.” Either way, it’s going to be an exciting Christmas holiday for the South American country, and Milei’s presidency has only just begun.
2023-12-15 05:32:25
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