The USD/ARS exchange rate has gone vertical and is hovering at its all-time high. The pair has risen in each month since January 2020. It has soared by over 11,280% from its lowest point in 2017. This surge has made the Argentine peso the worst-performing currency in the world.
Argentine lira is plummetingThe Argentine peso has continued plunging under Javier Milei, the populist president. It has fallen by over 4% this year as his reforms have taken longer to achieve. The most important reform measure was that he achieved the first budget surplus in 12 years in January.
He achieved that by cutting payments to provinces and freezing the budget. He also failed to uprate pensions and benefits for inflation, a move that analysts believe is vastly unsustainable.
His biggest plan, however, stands no chance in the Argentine parliament. As a result, in a recent interview with FT, he said that he was hopeful to pass some of these bills after the mid-term elections. He also wants to use decrees, a move that will mostly be challenged by parliament.
Meanwhile, the Argentine peso has crashed even as the country’s inflation has remained under pressure. The most recent data showed that the headline Consumer Price Index (CPI) came in at 20.6% in January from 25.5% in the previous month.
Inflation has continued soaring on a YoY basis. It rose by 254.2% in January from 211.4% in December. This is notable since inflation stood at 35% in 2020.
The risk for Milei is that these price hikes are not sustainable and could lead to protests and instability in the country.
Argentina is in a debt crisisFurther, there is a big risk that the government could default on its debt obligations. It has about $5.5 billion in upcoming maturities, which it needs to refinance. Also, the country has over $44 billion in outstanding loans that it is struggling to pay.
Worse, some of its top exports are not doing well. Corn, its biggest export, has seen its price collapse to its lowest point in 2020. The same is true with soybeans, soybean oil, and wheat. Similarly, battery electric metals like lithium, which Argentina wants to be a leading player have crashed.
To complicate matters, Argentina is fighting in a US court after the country was ordered to pay $16 billion. The government, which has been joined by other South American countries, has argued that it cannot afford these sums since they account fir 45% of the budget. Losing the appeals case could mean more problems for Javier Milei’s administration.
Therefore, there is a likelihood that the USD/ARS pair will continue rising in the coming months as Milei works to solve the country’s problems.
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