The Agony of the Argentine Peso

El Cronista – Argentina has two issues on its agenda that strain the economy. On the one hand, the pandemic and, on the other, the renegotiation of the debt. Both problems expose the weaknesses that our country presents as a result of not having a healthy and strong currency and this is reflected in the exchange gap that reaches 80% and is scary.

The increase that we observe in the last days of the parallel dollars reflects the loss of value that the peso has been suffering. The incredible monetary issue, the lack of attractive investments in pesos and the tension over the renegotiation of the debt are the fuel that set the US currency on fire.

In the midst of all this dollar madness, the BCRA announced that a new $ 5,000 bill will soon begin circulating given the low value of the $ 1,000 bill at this point. Recall that this last banknote, when it came into circulation (December 1, 2017), had a value of US $ 57.37 while it is now worth only US $ 8.44 (taking as reference the Counted Liquidation dollar). This means that it lost 85% of its dollar value in just over two years.

Graph I: Evolution of the dollar value of the $ 1,000 bill

Source: Liberty and Progress based on Rava Stock Market

The brand new $ 5,000 bill is born with a lower value than its predecessor was born. Although we cannot extrapolate what happened with the hornero bill to the doctors’ bill, everything seems to indicate that the US $ 42.21 that the new bill is worth today, at the rate of issuance that is being observed and that, if that continues, it will evaporate fast.

In the rest of our neighboring countries, the larger denomination banknotes tend to remain stable and are not continuously bringing new designs to the streets. In Chart 2 we see that, excluding Venezuela, with the new banknote we are third in the ranking of higher denomination banknotes with more value in dollars. First there is the S / .200 nuevos soles banknote from Peru that came into circulation in 1991. Lastly, comfortable, our $ 1,000 banknote appears, which is no longer competing in this ranking.

Graph II: Highest denomination banknotes of the countries of the region measured in dollars

Source: Own data based on Oanda

Beyond the ranking of banknotes or the issuance of higher denomination banknotes, it is clear that the fault lies not with the poor pieces of paper. The irresponsibility of our rulers means that the only source of financing for the state’s continued deficit is the printing of money. In this way, the money supply increases while the demand continues to fall (beyond the increase in the demand for conjunctural money due to quarantine), generating a loss of purchasing power for our currency. It is no coincidence that Peru has not had to issue higher denomination banknotes since 1991 and that it continues to be worth more than those of the rest of the countries. They learned the lesson of the hyperinflation that ended the Inti (the currency before the new sun) and maintain a fiscal and monetary prudence that allows them to have a currency that fulfills the three basic functions: Unit of account, means of circulation and reserve of value. In our case, the Argentine Peso fulfills 1 and a half functions. Needless to say, the one that does not comply is the value reserve. The one that fully complies is the means of circulation, while the unit of account function is half fulfilled since there are markets that agree on their values ​​in dollars, such as the real estate market, and on top of that the values ​​that are agreed on in pesos suffer from a lot volatility.

The economy minister always says that Argentina will pay the debt when the economy grows. But for this we need savings and investments in large quantities and the projects that require the most investments are the long-term ones. With an unstable currency like ours it is impossible to make plans beyond the short term and, added to the high tax pressure and the constant change of rules of the game in the field of business, our country scares anyone who comes to invest a dollar in our country. If we do not create a business friendly climate, Argentina will not be able to channel sustained growth that will take us out of this agony of living in a permanent crisis.