Tuesday, March 5, 2013

Argentine peso blues



The Argentine peso is headed for yet another big devaluation. The government has been propping up the peso by restricting people's ability to sell it, and by selling its holdings of foreign reserves, which are down 20% in the past two years. It's foolishly attempting to convince the public that inflation is only 10% when in reality it is closer to 30%. But currency in circulation is growing by almost 40% per year, and to judge by the decline in the unofficial "blue" peso rate (see chart above), demand for the peso is in free-fall, at the same time the government is running the printing presses 24/7. Inflation is thus likely to accelerate, even as the economy slows, thanks to ill-advised import limitations, currency controls, and unofficial capital flight. It's a recipe for yet another big devaluation disaster, and the only question is when, not whether it will occur. The fuse is short and getting shorter by the day.

If you're traveling to Argentina, you'll want to take plenty of $100 bills with you so you can exchange them for pesos at the "blue" rate (about 8) at hotels and restaurants (the government says it's illegal to do this, but demand for dollars is so high you shouldn't have much of a problem). Otherwise, if you use a credit card or ATM you will be exchanging dollars for pesos at the official rate (currently 5). That's a huge difference: on the "blue" market your dollar buys 60% more pesos than it does at the official exchange rate.

I've seen this movie so many times in my 40 years' experience with Argentina that it is like watching a slow-motion train wreck. If I've learned anything, it's that you can never underestimate the ability of the Argentine government to screw things up. The incompetence and corruption of the government is endemic and criminal.

4 comments:

Gloeschi said...

Scott's posts on Argentina are always spot-on, presumably due to personal experience and family ties.
Wouldn't hurt to live with a US family with median household income for a week. Wonder if he would still sing from the GOP's hymsheet proposing abolishing corporate taxes and shifting all tax burden onto consumers. As if income distribution in the US wasn't imbalanced enough yet.

Donny Baseball said...

Gloeschi, so all the income tax burden is currently NOT on consumers??

Might be time to back to economics class...or to class for a first time...

Benjamin Cole said...

Something about Latin America...good governance just is not their thing........

Michael McGaughy / 麥德安 said...

Thanks for posting. Very interesting stuff.