The Argentinian Peso

The Argentinian Peso is currently trading at about 67 to the US$ having fallen significantly in value during the past two years. The Peso was launched in April 1991 under President Carlos Menem at the rate of 1 Peso = 1 US$ under the Convertibility Law. It was designed to bring an end to the hyperinflation that had ravaged Argentina during the previous decade and a half.

The rate of the Peso to the US$ was fixed under a Currency Board (much like, say, the Bahamian $ is fixed at US$1) and this held until December 2001 at which point the Peso devalued.

The underlying cause of Argentina’s currency troubles is the nature of it’s insertion into the international economy. For decades Argentina followed policies of exporting agricultural and primary produce and importing machinery and other inputs needed by it’s domestic industrial sector. However it’s manufactures only supplied the domestic market and were not competitive internationally. From the 1990’s onwards Argentina attempted to remedy this by South American integration under Mercosur under which there would be a free market for manufactures throughout the region and, in particular, there was integration of the motor industry with Brazil.

However, in 1999 Brazil was forced to devalue the Brazilian Real (which, like the Peso, had been launch in 1995 at the rate of 1 to US$1) and overnight Argentinian industry became uncompetitive. Rather than allow the Peso to follow the fortunes of the Real the Argentinian Government stubbornly refused to devalue and defended the US$ exchange rate (with the support of the IMF) at huge cost until devaluation was forced upon it on 29^th November 2001.

Argentina subsequently broke with it’s creditors and with the IMF and defaulted on it’s debt obligations. Over the course of most of the next decade the Argentinian economy grew strongly even though it was technically in default and cut off from international borrowing. The economy grew mostly because industry and exports benefited from the competitive exchange rate. However since 2012 growth has stalled.

Unlike it’s neighbour Chile, Argentina is not well run as a State. There is a failure to choose a course and stick to it. Rather this is replaced by flip flopping according to short term expediency. Whereas Chile has supported it’s export sector and promoted vertical industrial integration where it is internationally competitive as well as diversifying it’s exports by type and destination Argentina cannot seem to decide what it wants to do. Thus it occasionally resorts to the counterintuitive policy of taxing exports and it has been a laggard in developing markets in Asia for its products.

There has been persistent inflation always in double digits since 2002 and, in this regard, Argentina is an outlier in all of Latin America with the exception of Venezuela. The underlying cause of the inflation is the failure to balance Government revenues with expenditures and this is due to a lack of discipline on the part of the political system.

In the later years of the Presidency of Fernandez de Kirchner the fiscal deficit grew rapidly. In December 2015 incoming President Macri vowed to address the underlying issues and return the economy to a sustainable course which included the Fiscal Sustainability Law in 2017. Macri also settled with Argentina’s holdout creditors from the 2002 default which allowed Argentina to return to the international debt markets and borrow from the IMF.

However international capital markets appear to have a short memory and did not take heed of the lessons of the past. Argentina borrowed from abroad without first addressing the internal imbalances in it’s economy. It then ran into difficulty servicing this debt (something which was entirely predictable) and borrowed a huge sum from the IMF to cover it’s short term obligations (again a repeat of the turn of century crisis).

The loss of international confidence caused the Peso to tumble and Argentina is currently seeking reduced interest terms on it’s international debt which would be a de facto default. In my view the best course for Argentina going forward if this restructuring succeeds (or if it doesn’t) is to forget about borrowing internationally for a long time. It needs to create the political institutions and checks and balances that allow it to reduce it’s budget deficit and inflation rate for the long term and reorientate it’s economy towards an export sector that is internationally competitive and diversified by product type and country.