The panic of ordinary Argentines on the eve of the vote and dollarization – 10/21/2023 – Vinicius Torres Freire

On Friday (20), there was no market, no price, for the parallel dollar in Buenos Aires, Argentine newspapers and journalists report. The fear of a mega-devaluation of the peso and, perhaps, of an official dollarization plan further disoriented the prices of the “blue dollar”, the parallel, between 950 and 1,500 pesos.

The absurdity of the quotations, when there was one, was made worse by rumors and raids by the IRS, among other inspections, constant in recent weeks. In banks, Argentines get rid of assets in pesos, which got worse after Javier Milei’s favoritism.

Those who don’t find dollars hunt with stocks. Anticipate purchases, even in supermarkets. In retail, sales increased by around 10% in September (compared to 2022), reports the newspaper “La Nación”.

At the official exchange rate, one dollar is worth 350 pesos. Judging by the IMF’s August agreement with the Argentine government, there would have to be a real devaluation of the peso of between 5% and 10% by the end of the year, based on the rate at the end of July. Given inflation since June and the expectations compiled by the Central Bank of Argentina (BCRA), the dollar would be 88% more expensive, close to 540 pesos at the end of 2023. Based on the panic rate, it seems low.

Anyone who looks at a table of basic accounts of the federal government of Argentina has the impression that they look similar to those of the federal government of Brazil. Net revenue of 17.6% of GDP, equal. Expenditure of 19.6% of GDP in Argentina and 18.3% in Brazil. Similar salary and pension expenses. The Argentine government invests more (in works) and subsidizes electricity, gas, public transport and water (2.3% of GDP).

Obviously, Argentina’s primary deficit forecast for 2023 is larger than Brazil’s, which is already quite bad (about 2% versus 1% of GDP). Primary balance: revenue minus expenses, apart from debt interest expenses. Argentine public debt would end the year at close to 89% of GDP, similar to that of Brazil (according to the IMF method).

From this table, the neighbors don’t seem so unhappy. But the costumes in the numbers don’t tell the plot of the play. Argentina has no currency. What matters here, Argentines do not want to keep their holdings in pesos, currency or financial assets, such as government debt securities. At the end of this year, more than 41% of the debt will be held by the public sector (29% by BCRA); 21%, from multilateral institutions (such as the IMF) and external official creditors. Of the annual deficit in 2023, 40% has been financed directly by the BCRA (there is indirect financing).

Argentina does not have currency due to a history of inflation, financial repression, defaults and various tricks. Since joining the IMF in 1956, he has used the Fund once every three years.

Dollarization is much more than exchanging colored notes for green ones. In itself, it does not solve the deficits or the tricks and tricks in the exchange rate, debt, taxes, prices, etc. The economy is full of “cats”.

Dollarization is a straitjacket that may initially facilitate changes and reduce inflation soon (depending on the conversion rate). But it demands a lot of dollars, is technically difficult and will leave Argentina without much of a macroeconomic policy instrument, subject to recessions, deflation (fall in real wages) and banking crises even if it is not the registry office’s fault.

Ultimately, the core of an economic stabilization plan will not be very different, with or without dollarization. There will have to be severe cuts in spending and subsidies (who pays the bill?), even greater with dollarization. The end of the exchange rate madness, capital and price controls, devaluation, all of this will cause major adjustments in relative prices, losses and gains. To be successful, there is a great risk of breaking your dick, to put it bluntly.

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