Date
23 October 2018
Demonstrators march on Buenos Aires' financial district on Wednesday to protest against the economic measures taken by President Mauricio Macri's government. Photo: Reuters
Demonstrators march on Buenos Aires' financial district on Wednesday to protest against the economic measures taken by President Mauricio Macri's government. Photo: Reuters

What triggered Argentina’s economic crisis?

Over the past two weeks, the Argentine peso has lost 10 percent of its purchasing power. It has depreciated more than 50 percent against the US dollar in a year.

Interest rates have soared, plunging the South American nation into an economic crisis.

The chaotic situation stemmed from an external trigger and a set of internal problems.

As the United States is moving to normalize its monetary policy, the higher US dollar interest rates have led to a stronger greenback.

Currencies in many developing economies such as Brazil, India, Indonesia and the Philippines have fallen 5 to 10 percent against the US dollar over the last 12 months amid capital outflow triggered by higher US dollar interest rates.

But the Argentine peso’s fall has been far more dramatic, prompting local companies and residents to rush to convert their savings into foreign currencies such as the US dollar and the euro. Foreign investors are also withdrawing capital fast, exacerbating the currency’s weakness.

Argentina’s central bank has hiked its key interest rate to 40 percent in a bid to stem the peso’s fall but with limited success thanks to the shaky economic fundamentals.

Overreliance on agriculture and the worsening trade deficit, which doubled to US$30.8 billion last year, are some of the key issues.

Additionally, the nation is burdened by a foreign debt of US$252.9 billion, which is close to 70 percent of its gross domestic product. Its fiscal deficit has exceeded 5 percent of the GDP.

President Mauricio Macri has introduced economic reform measures since taking office in 2015, including opening up the financial market and introducing foreign investment.

The local equity market surged 73 percent last year, after soaring 45 percent in 2016. But the rally lacked fundamental support.

Argentina has allowed the free flow of capital since 2002, which is a good thing under normal circumstances. But as soon as signs of economic weakness emerge, the inflow of hot money reverses, and the strength of the US dollar worsens the domino effect.

The nation is seeking a US$30 billion credit line from the International Monetary Fund to stabilize the situation.

The question is, would that be enough? And would the crisis spread to other emerging economies?

This article appeared in the Hong Kong Economic Journal on May 8

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RT/CG

Hong Kong Economic Journal columnist

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