On the 14th of last month, the Central Bank of Argentina raised the official exchange rate of the peso by 22.5% to 350 pesos against the dollar. Since early last year, the peso exchange rate has risen to 240.7 percent against the dollar. The peso’s purchasing power has been depreciated by 70% in less than two years. In addition, Argentina’s inflation rate in July this year was 113% compared to the same month last year-on-year. Argentine people are flocking to the foreign exchange black market, or “blue market,” as the government regulates foreign exchange transactions despite the plunge in the value of the peso. The “blue dollar” exchange rate traded here is currently around 730 to 750 pesos per dollar, more than twice the official exchange rate. It was named Blue, not Black, because of its weak illegality.
The ‘blue dollar’ symbolizes Argentina’s economic crisis. Argentina’s economic growth rate is expected to reach -2.2 percent this year, and the size of the fiscal deficit is expected to reach around 4 percent of gross domestic product (GDP). Argentina’s central bank recently raised its key interest rate to a 21-year high of 118 percent to stem inflation and attract market dollar funds into the system. However, the peso’s value is expected to fall to 590 pesos per dollar next year, so it is unclear whether the key interest rate hike will work.
The biggest problem is the lack of political leadership. Since Juan Domingo Peron took office in 1946, the governments that put forward structural reforms have repeatedly lost elections as people have become accustomed to populism. Recently, international financial markets have been on edge as far-right Congressman Javier Milay topped the presidential primary. He pledged extreme policies such as abolishing the peso, blowing up the central bank, and legalizing long-term trafficking. Argentina is one of the weakest links among emerging countries, with nine declarations of national bankruptcy in the past. If Milay is elected president in the finals on the 22nd of next month, volatility in Argentina’s foreign exchange market could increase, affecting other vulnerable countries such as Turkey, Egypt, and South Africa. It is time to closely watch the possibility of financial instability in emerging economies from Argentina.
