Argentinas Trump Milé elected as new President, previously advocated for blowing up the countrys central bank and full dollarization; what information is worth paying attention to?

Economic Chaos in Argentina

What concerns me more is the currency swap agreement between Argentina and China, and what will happen to the debt owed to China?

Since “Argentina’s Trump” Milei was elected as the new president, things are definitely going to be extreme, and some investment layouts in Argentina might go down the drain.

This person is crazy and chaotic, with an attendance rate of only 52% during his time as a senator.

He advocates for “economic shock therapy” and wants to “saw open” Argentina’s political and economic situation, claiming that only he can change Argentina’s economic system.

He suggests closing down the Central Bank directly, abandoning the peso and adopting the US dollar, and reducing social welfare.

Everyone calls him a “madman” and he is also a rock musician, so there may be many illogical measures he takes.

What this person does is possible.

Recently, the use of the Chinese yuan in Argentina reached a historical high, and the progress of de-dollarization was good.

At that time, it was said that Argentina’s prices were soaring, inflation was severe, and the currency was rapidly depreciating.

So Argentina believed that “the only choice is to obtain yuan from the currency swap agreement with China.”

They even used yuan to repay US debt, expressing great gratitude towards China.

I wonder if Milei will acknowledge these debts in the future.

Will he repay us? That is truly uncertain.

It was indeed a surprising turn of events. Previously, everyone believed that someone so exaggerated could not possibly be elected. Perhaps Argentina wants a comprehensive reform.

Argentina’s economy has been on the verge of collapse, with two-fifths of its citizens living in poverty, and an annual inflation rate close to 140%.

Since the economy is already in a terrible state and inflation cannot be controlled, they thought they would try something unique, like a desperate measure to treat a dying horse.

Before, who would have expected that Javier Milei would be elected as the new president of Argentina with a vote rate of 55.95%?

Due to this, Argentina’s financial market has experienced a stock, bond, and foreign exchange market crash.

The market is concerned about the election of such a person, so they are frantically selling pesos, leading to a severe depreciation of the exchange rate.

News at that time reported an exchange rate of 1 US dollar to 1050 Argentine pesos.

Argentina raised interest rates by 2100 basis points, from 97% to 118%.

The Argentine stock market plunged by 14%, and Argentine bonds also fell.

This time, all the efforts Argentina has made to de-dollarize have gone up in smoke.

Argentina still seems too unstable, and it is more likely to suffer losses when doing business with such a country.

Argentina’s debt problem is also very serious, with its external debt reaching $276.7 billion last year.

However, its foreign exchange reserves are less than $32 billion for 22 years, and the latest data shows that they probably have no foreign exchange reserves left.

Inflation + debt + various chaos, Argentina will face many troubles in the future.

At the beginning of the 20th century, Argentina was once one of the wealthiest countries in the world. From 1880 to 1935, the average annual inflation rate was only 0.9%.

Per capita income even surpassed Germany and the Netherlands.

But later on, it became worse and worse, resulting in skyrocketing inflation and economic collapse.

Previously, Argentina’s development relied mainly on fertile land and agricultural development.

At the beginning of the 20th century, Argentina became a global agricultural power, but it did not keep up with technological advances and failed to develop its manufacturing industry well.

Later on, it became increasingly worse, unable to keep up with the pace of global economic development.

Moreover, Argentina lacks mineral resources and has a weak industrial base. Apart from agriculture, it has not developed any other industries.

Argentina’s capital has been continuously flowing out, and even its own people do not invest in Argentina.

There has been no way to upgrade its industries, so they can only continue like this. In fact, it doesn’t matter who comes up as long as they can repay the debts owed to China.

Challenges of Argentina’s “Dollarization” Policy

Previously, many predicted that Mila would have a difficult time becoming president, similar to Trump during his campaign. The nickname “Argentina’s Trump” was indeed well-deserved:

Apart from advocating for “full dollarization,” Mila’s political views also include “relaxing gun control,” “banning abortion,” and “cutting off trade with China,” all of which are aimed at comprehensive Americanization.

In late September, he published an article in The Economist, elaborating on the ideas behind his economic policies:

At the beginning of the 20th century, Argentina was once one of the wealthiest countries in the world. From 1880 to 1935, the average annual inflation rate was only 0.9%. After the establishment of the central bank in 1935, Argentina’s inflation rate soared to an average of 6% per year. From the nationalization of the central bank in 1946 to 1991, Argentina’s average inflation rate was 250% per year.

Therefore, Mila believes that for Argentina, the central bank is a “complete disaster” and the peso is a tool for politicians to steal national wealth. Both should be abolished.

Currently, Argentina’s economy is in trouble. In April of this year, Argentina’s annual inflation rate soared to 104.3%, surpassing triple digits for the first time since the severe inflation events in 1991, making it one of the countries with the highest inflation rates globally.

At the same time, Argentina is facing severe debt pressures. Data shows that Argentina’s foreign exchange reserves have fallen to less than $32 billion, and its external debt is projected to reach $276.7 billion by the end of 2022. In a statement, the IMF said that due to the greater-than-expected impact of drought, Argentina’s economic situation has worsened, significantly affecting exports and fiscal revenues.

In terms of the exchange rate, the Argentine peso has seen a sharp decline. Since the beginning of this year, the official exchange rate has dropped by nearly 50%, to around 350 pesos per dollar. The decline in the black market exchange rate is even more significant, reportedly reaching 600 pesos per dollar.

However, Mila’s dollarization proposal faces considerable challenges, with the most pressing issue being the insufficient foreign exchange reserves of the government departments. Any dollarization proposal would require raising enough dollars to substitute for domestic currency assets.

The Argentine central bank currently has $24 billion in foreign exchange reserves, of which $10 billion is the reserve requirement of private sector foreign currency deposits. Additionally, not all of the central bank’s reserves are in dollars; $18 billion are part of a currency swap agreement with the People’s Bank of China.

This results in the commonly used indicator of “net foreign exchange reserves” being negative. Experts have estimated that Argentina’s net foreign exchange reserves are negative $5 billion. Calculated based on an unofficial swap rate (the implied rate between pesos and dollars), the basic currency reserves are $9 billion. Banks also hold reserve requirements in local currency, mainly in the form of $28 billion worth of remunerated central bank notes calculated based on the unofficial swap rate.

The gap between negative net foreign exchange reserves and the domestic currency debt of $37 billion ($28 billion + $9 billion) raises doubts about the feasibility of full dollarization.

Mila has publicly stated: “The higher the dollar rises, the easier dollarization becomes.”

In essence, it means that as the domestic currency and assets depreciate, the fewer dollars are needed for substitution through dollarization. However, the question is whether the Argentine government can accept the anger of the domestic population left with nothing during this depreciation process.

I am very much looking forward to this Argentine Trump’s presidency and his economic experiment in Argentina. Especially regarding the complete severance of trade with China and the wholehearted support for the United States, China is Argentina’s second-largest trading partner and has voiced support for Argentina on the issue of the Falkland Islands. Let’s see if the United States will support Argentina.

That being said, he also criticizes the refusal to dollarize as a lack of freedom… You have the freedom to use dollars, and I have the freedom not to use them. Isn’t freedom supposed to be two-way? This double standard is so American, learning from the 66th.