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Argentina’s Big Dollarization Risk
The country needs a hard currency, but finding the real peso-dollar market rate could be painful.
By Mary Anastasia O’GradyNov. 26, 2023 at 4:41 pm ET
Argentine presidential candidate Javier Milei raises a mock-up dollar bill with his depiction on it at campaign event in Cordoba, Argentina, Nov. 16. PHOTO: ARIEL ALEJANDRO CARRERAS/EPA/SHUTTERSTOCKThe most notable part of Javier Milei’s victory speech on Nov. 19 was what he didn’t say. Argentina’s president-elect promised to rebuild the country, reconcile fiscal accounts, and bring liberty to long-suffering Argentines. But he never mentioned dollarization, which had been a key plank in his platform.
On Thursday news broke that Milei adviser and dollarization advocate Emilio Ocampo declined the post of central bank president. This is a sharp departure from expectations created in September when Mr. Milei said the former Morgan Stanley managing director would be the man for the job.
Also on Thursday news reports emerged that Mr. Milei’s choice for economy minister is anti-dollarization economist Luis Caputo, who was finance minister for former president Mauricio Macri. While the Caputo nomination isn’t official, differences between the two candidates would be the best explanation for Mr. Ocampo’s change of heart.
This is by no means the end of Mr. Milei’s promise to close the central bank and dollarize. But it does suggest that he doesn’t have the stomach to try it immediately. Backing away in the short run may be politically practical but it also raises the odds it will never be done.
There’s a reason the Argentine flag is the international symbol for inflation. For decades successive Argentine governments have spent more on their populism than they’ve been able to collect in revenue. To close the gap, after the capacity to borrow has been exhausted, they’ve instructed the central bank to print whatever is necessary to pay the bills. Any pretense of central-bank independence quickly withers before a voracious political class.
To cure the resulting inflation, governments have imposed price controls, capital controls, more protectionism and heavy regulation. Argentines have plenty of practice staying one step ahead of the authorities. Dollars flee across the water to Uruguay or are hoarded at home. The economy shrinks, foreign and local investors disappear and real prices of assets tumble.
If only it were safe to hold greenbacks in Argentina, knowing they couldn’t be confiscated by the government and could be taken out of the bank or the country at will. Locals, who are said to hold some $230 billion in coffee cans, under mattresses, and abroad, might put their money in banks, where they could tap into credit at dollar prices. Foreigners might rush to buy into one of the richest, most undervalued markets in the world.
This is the motivation behind Mr. Milei’s campaign pledge to dollarize. No more pesos, no more problem. On Friday the office of the president-elect reiterated that “the closure of the Central Bank of the Argentine Republic (BCRA) is not negotiable.” Presuming that his word is good, the questions now are timing and sequencing.
To dollarize the government would choose a date to convert all legal contracts, bank accounts, and assets and liabilities of firms and the government into dollars. The transition requires peso-price discovery, which in turn requires letting the currency float freely and lifting capital controls for a period before the conversion. Pesos in circulation can be gradually redeemed for dollars over time and the monetary base is frozen. Dollarization would boost confidence, the theory goes, and thereby solve a severe dollar shortage. That said, the uncertainty isn’t negligible.
The central bank has negative net reserves, can’t provide importers the dollars they need to pay suppliers, and is running a high-yield Ponzi scheme with banks. The government is bankrupt. Would a sudden burst of trust in the Argentine state materialize if it made the dollar the national currency while committing to a future fiscal adjustment and deregulation of labor markets? It’s possible that the former might force the latter. Mr. Milei’s strong showing with 56% of the vote allows him to claim a mandate, Congress will be under pressure to let him pursue his agenda and some moderate Peronists and other opponents may see it in their interest to advance reform.
But let’s not ignore the magnitude of the crisis Mr. Milei inherits. The current official exchange rate is 350 pesos to the dollar and in the black market, it’s around 1,000 pesos to $1. Because of exchange and capital controls, no one knows the peso’s true value. If, as is likely, hyperinflation already exists, then the fuse is lit. The bomb is about to be placed in Mr. Milei’s lap.
Argentina is in for a painful adjustment. The best Mr. Milei can do is minimize the damage from the explosion while trying to protect his political capital. A controlled devaluation over time—leading to the end of the pegged exchange rate and free capital flows—if accompanied by structural reforms could soften the blow. But that’s a lot of “ifs.” The larger imperative of terminating the abusive power of the state to print money won’t go away. Argentina needs a hard currency.
Write to O’Grady@wsj.com
