Bills fill their pockets to get out on the streets, what happened to Argentina this time? | Kyo Brewery

Many developing economies, like Argentina, are at risk of economic turmoil due to the return of the dollar.

President Fernandez of Argentina. Photo: Xinhua News Agency

Text | Xu Lifan

According to media reports, as Argentina faces severe inflation, local people need more paper money to cover daily living expenses, and at some point, these banknotes are too many to fit in their pockets. The reason is that 1,000 pesos (about 56 yuan) can't buy two packs of better quality toilet paper.

This phenomenon is more indicative of the magnitude of the depreciation of the Argentine peso than macro data – according to the Argentine National Statistical Office, argentina's cumulative inflation rate exceeded 23% in the first four months of this year. Annualized inflation rose to 58 percent over the past 12 months, the highest in 30 years.

In fact, Argentines are no strangers to inflation and debt crises. In 1989, Argentina's inflation rate exceeded 3,000%; in 2001, Argentina's debt crisis once restricted withdrawals and foreign exchange exports; and since the outbreak of the new crown epidemic, Argentina has in fact defaulted on sovereign debt on many occasions.

Inflation in Argentina is nothing new, but it is worth paying attention to whether it portends the risks that emerging economies are facing now, and whether it will evolve into a larger crisis.

Street view of Argentina. Photo: Xinhua News Agency

The large outflow of the US dollar is the driving force of inflation in Argentina

The biggest trigger for this round of inflation in Argentina is that after the Fed raised interest rates and caused the dollar to appreciate, a large amount of international short-term capital flowed out of the Argentine market.

In fact, the outflow of the US dollar from Argentina has been going on for quite some time. According to statistics, during the right-wing Macri administration from 2015 to 2019, Argentina's cumulative capital outflow reached $70.885 billion, which even exceeded Argentina's level of foreign exchange reserves (about $60 billion).

In March, the Fed announced an increase in the federal funds rate by 25 basis points to a range of 0.25% to 0.5%, kicking off a new cycle of interest rate hikes. It's a quick round of rate hikes. In the three-year slow interest rate hike cycle of the US dollar from 2015 to 2018, that is, during the Macri administration, the Argentine peso was unsupported due to the outflow of the US dollar that made Argentina's foreign reserves negative, and it depreciated by 30% at one point.

The rapid interest rate hike of the US dollar has led to a large number of people quickly exchanging pesos for the US dollar - some researchers estimate that since March, Argentina's foreign reserves have lost another 20 billion US dollars. Declining foreign reserves, soaring levels of currency and, more seriously, Argentina's debt to a greater external debt have set the stage for a greater economic crisis. Fortunately, Argentina has good news on its debt.

A double-decker tour bus with the tiger of the Chinese zodiac and the Beijing Winter Olympics logo stopped in front of Chinatown in Buenos Aires, Argentina, on Jan. 28, 2022. Photo: Xinhua News Agency

The world fears that Argentina will become the next Sri Lanka

Good news for Argentina is that in March, the Argentine government finally reached a key technical agreement with the International Monetary Fund to repay $45 billion in debt. Under the agreement, the Argentine government owes the IMF and has matured a huge debt that could be repaid from 2026 until 2034.

In order to postpone the repayment of the debt, the Argentine government has been negotiating with the IMF for three years.

In fact, this debt was not borrowed by the current Argentine left-wing government, but during the Macri government.

In 2018, due to the impact of the dollar flight, the Macri government and the IMF signed loan agreements of up to $57 billion. This is the largest loan in the history of the IMF. Argentina thus became one of the IMF's largest debtors.

It is conceivable that if this debt is not extended, Argentina's current foreign exchange reserves will be almost unable to cover the debt, and Argentina will face the situation it was in 1989 , inflation of 3,000% without external reserves. This is bound to trigger political instability and a greater economic crisis.

The absence of foreign reserves has led to a debt crisis, which is precisely the situation Sri Lanka has recently faced. Many people are watching who is next to Sri Lanka in the case of the return of the dollar, while many eyes are focused on South America.

After Argentina received a debt moratorium, at least for now, a larger economic crisis has been avoided. This is not bad news for left-wing currents in Argentina or even Latin America. Now, as a result of the indirect effects of the Russian-Ukrainian military conflict, Argentina faces a new opportunity to rein in inflation and turn its economy up.

A delivery man walks through an empty street in Buenos Aires, Argentina, on May 22, 2021. Photo: Xinhua News Agency

Food and lithium mines could lift Argentina out of crisis

Recently, research institutions have given a more optimistic judgment on Argentina's economic growth forecast in 2022, believing that Argentina's economic growth can reach about 3.6% in 2022. This has already exceeded the South American average and the economic growth rate of the United States this year.

For now, Argentina has two key areas to keep its economy healthy, thereby thickening its reserves and controlling inflation.

First, Argentina is one of the world's granaries and a major exporter of cereals and corn. Affected by the Russian-Ukrainian military conflict, Ukraine's grain production has dropped sharply, Russia's grain exports have been restricted, and the world generally expects that there will be a shortage of grain this year. Argentina can complement that.

In March, Argentina's grain export earnings reached their best level in 20 years, with cereal export earnings alone approaching $8 billion in the first quarter. This is the beginning, and argentina is expected to export more grain and earn tens of billions of dollars in revenue in the future.

In addition, Argentina has the richest lithium deposits in the world. Chile, Bolivia and Argentina are known as the "lithium triangle". In the past, Chile was the main seller in the international market, while Argentina's lithium deposits were about twice that of Chile, with 19 million tons untapped.

Lithium is the main raw material for electric vehicle batteries, and electric vehicles are currently the industrial focus of major countries, so now a large number of international capital has entered Argentina to invest in lithium mines, including Chinese companies.

Now that there are many crises, there may be a bright future, provided that Argentina can solve the problems of vacillating economic policies, a single economic structure and an excessive concentration of capital. This is also the background in which Argentina's left-wing parties can come to power.

Therefore, it can be said that many developing economies with less economic endowments than Argentina are actually at greater risk of economic turbulence in the face of the return of the US dollar than Argentina.

Written by / Xu Lifan (Columnist)

Editor / He Rui

Proofreading / Zhao Lin