Argentine Economist Proposes Dollar Adoption as Peso Nears Collapse

<p>The Argentine peso, which has been tagged the worst-performing currency in emerging markets, may soon be replaced by the dollar if Javier Milei, an Argentine economist running for president, wins in October. Milei said that to combat triple-digit inflation, the nation should formally adopt the dollar. Argentina’s central bank benchmark interest rate currently stands at 97%, and economists have pencilled in a recession for 2023, which would be the third in five years. Milei noted that “the peso melts like ice in the Sahara Desert,” referring to the currency’s rapid depreciation: it has lost half of its value against the dollar in the past year.</p>
<p>Should Milei win the presidency and bring his proposal to fruition, Argentina will become the largest economy to dollarize, with a GDP about five times that of Ecuador’s, the biggest among the seven sovereign nations that have embraced the greenback. However, many Argentines oppose the move. Two recent polls that each surveyed about 1,000 Argentines showed that more than 60% are against dollarization. Besides, economists suggest that the government should focus on reining in its chronic budget deficits that they claim are the root cause of peso weakness and inflation.</p>
<p>Several economists have come out against dollarization, stressing that it would cede control over monetary policy to the US Federal Reserve. Among the possible downsides is that a strong dollar would prompt Argentine demand for imports while making exports more expensive, potentially setting the stage for a balance of payments crisis. Beyond that, Argentines are wary of ceding control to the dollar due to the country’s past experiences. Argentina’s good fortune ran out in the late 1990s when the country’s grain exports sagged but bond issuance continued despite persistent budget deficits. President Eduardo Duhalde, in office for fewer than 15 days, severed the peso’s link to the dollar in early 2002, sending the currency into a free fall.</p>
<p>While Milei wants to blow up the central bank, many argue that what is needed is to rein in budget deficits. Others contend that dollarizing is making the country wear a straitjacket instead of prescribing it a better diet. Ocampo, who authored a text on dollarization that sold out in Buenos Aires, insists that “for better or worse, Argentina will dollarize” but recognises that despite his best attempts to make his plan accessible, the mechanics are difficult for a general audience to grasp.</p>
<p>Despite the electoral outcome, analysts suggest that dollarization could mean an important change for emerging market investors, so they should look at the issues underlying the currency’s volatility to manage potential risks.</p>
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