Argentina’s stabilization is Brazil’s problem – 05/11/2023 – André Roncaglia

Last week I looked at how the dollar system provides a financial infrastructure that facilitates international trade. On the other hand, the hierarchy of currencies in the “dollar system” imposes unequal effects on countries at the center and at the periphery.

As economic historian Adam Tooze has pointed out, “the combination of an energy price shock and a strong dollar is looming around the world, putting pressure on consumers and governments alike.” Economies that, for various reasons, cannot obtain dollars to finance their exchanges with the rest of the world suffer paralyzing external restrictions. This is the case of Argentina.

In Argentine informal bi-monetarism, the peso plays the dominant (but not full) role as a medium of exchange, but it is up to the dollar (and, to a lesser extent, the real) to play the roles of unit of account and store of value. This fragmentation of money functions is typical of chronic inflationary processes.

The country’s external fragility is the primary source of inflation. The first cause is the monetary policy of negative real interest rates (81% compared to annual inflation of 104% in April/23) and lower than the rate of return on financial assets denominated in dollars, aggravating the exchange rate pressure. Weight dripped into the bank account, people withdraw and buy dollars (or reais) and keep it at home. The country has one of the lowest bank deposit maintenance ratios (9% of GDP). An estimated $262 billion left the formal banking system to be hoarded by the private sector. This sum is equivalent to the entire external debt of the country!

The second cause of dollar shortages is structural and stems from accelerated deindustrialization, dependence on commodity exports and energy imports. For the last three years, the country has been facing droughts that have knocked out soy and wheat crops, undermining exports. O energy deficit accumulated US$ 5.2 billion in 2022, with US$ 2.3 billion spent on natural gas alone (hence the importance of building the Vaca Muerta gas pipeline).

But why is it relevant to us?

Argentina is the second largest economy in South America and is one of our main trading partners. An Ipea study shows that the industrial production of both economies is primarily oriented towards their internal markets and their main external destination is precisely the neighboring country. Our exports to Argentina generate, on average, five times more jobs than to China.

Far from being “a hopeless case”, the country has of valuable productive assets that can alleviate its external fragility, especially through regional trade. An example of the potential of regional cooperation is the development of the production of electric batteries from the abundant reserves of lithium in the border region between Argentina, Chile and Bolivia. This is a unique opportunity for proactive international insertion, with progressive distributive effects in social terms (better jobs) and environmental terms (green transition).

However, an Argentina in hyperinflation generates political instability, especially in an election year. Recent data suggest that accelerating inflation is translating into higher voting intentions for Javier Milei. If these imbalances are not corrected by financial and monetary reforms within a productive development plan, the extreme right will have a chance of winning the elections.

If that happens, Argentina’s isolation could threaten regional integration and, with it, prevent the reindustrialization of both economies and lose investment and trade opportunities for the region.

For these reasons, the stabilization of Argentina is our problem too!

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