Argentina elected its new President in November 2023: Javier Milei. Throughout his campaign, Milei made it clear that he wanted to shut down the Central Bank of Argentina (BCRA) and dollarise the Argentine economy. However, the jury is still out on if dollarisation is the solution to all of Argentina’s financial problems.
The last few years have been concerning for Argentina politically. In 2019 Alberto Fernández was elected President and faced the task of not only curbing inflation, but also limiting the spread of COVID-19 as the virus spread across the world. A tenuous few years followed as Fernández’s approval ratings remained consistently low. In fact, across the four years he was in charge, disapproval ratings ranged from 60 to 80 per cent.
Fernández did not wish to rerun in 2023. The election process that followed concluded in a run-off between Javier Milei and Sergio Massa, in which the former won with 55.7 per cent of the vote.
A new team for a new economy
Throughout his campaign, Milei made it clear that he was going to uproot the economy in an attempt to turn over a new leaf for Argentina. Over the past year, it appeared that Emilio Ocampo, the leading advocate within Milei’s team in favour of dollarisation, would be the one in charge of shutting down the central bank if Milei made it into office to see this plan through.
However, rumours have spread that Milei could be getting cold feet: that he may look to salvage and rebuild the peso and central bank. Though his office addressed these murmurs by saying the closure of the central bank was “non-negotiable“, Ocampo declined the job to take charge of the central bank. The role was instead filled by Santiago Bausili.
Change is needed
Luis Caputo was made the Economy Minister of Argentina and, a few days after Milei was officially made President, announced to the country that the peso would be devalued from around 400 pesos to the dollar to 800 pesos to the dollar.
Argentina is suffering from inflation, with it hitting 185 per cent in November 2023. With a variety of other announcements taking place, including cutting some state jobs to reduce the size of the government, Caputo said the changes were necessary to avoid hyperinflation.
Responding to the valuation drop and if dollarisation was still going to take place, Wes Levitt, CFA co-chief investment officer and head of Europe operations for Alpha Transform Holdings said: “I still see dollarisation as relatively likely, but the market’s strong positive response to his first moves could mean Milei manages to stabilize the Argentinian peso enough that they no longer need to dollarise.
“He cut the official exchange rate in half to match the true market exchange rate, and the market was receptive and there was little movement in the market exchange rate, suggesting that traders believe his actions are sound for now.”
Pros and cons of USD pegging
A Latin American (LatAm) country pegging its national currency to the US dollar is not an unfamiliar sight. In Panama for example, the Panamanian balboa is tied to USD, and in El Salvador, it is also legal tender.
Though being tied to the dollar has its benefits, it also has its drawbacks. For example, the country adopting the dollar no longer has control over its national currency.
Commenting on the likelihood of extended success if the USD is adopted, Levitt said: “It can be a successful long-term solution if Argentina finds it acceptable to import US monetary policy, or more likely they will take an approach like China did, when they pegged the yuan to USD for decades until it transitioned to a managed float in 2005 as they wanted more control over their monetary policy.”
Nonetheless, this was one reason El Salvador looked to adopt bitcoin as a national currency. Another was an attempt to tackle the massive divide in access to finance across the country, with 70 per cent of adults being unbanked. In light of its own economic struggles, El Salvador’s adoption of bitcoin so far has been a success as the country has already earned back on its investment according to the country’s president Nayib Bukele.
In a tweet on X, Bukele said: “With the current bitcoin market price, if we were to sell our bitcoin, we would not only recover 100% of our investment but also make a profit of $3 620 277.13 USD (as of this moment).”
The country has no intention of selling its reserves.
El Salvador's #Bitcoin investments are in the black!
After literally thousands of articles and hit pieces that ridiculed our supposed losses, all of which were calculated based on #Bitcoin’s market price at the time…
— Nayib Bukele (@nayibbukele) December 4, 2023
Is a digital future in Argentina out of the question
Should El Salvador continue to find success in bitcoin despite its volatile nature, and considering Milei’s views on a central bank-run currency in Argentina, it is not out of the question to think somewhere down the line, Argentina could look to emulate El Salvador and adopt bitcoin as a national currency.
Looking to the future, Levitt concluded: “We are cautiously optimistic about the effects of Javier Milei’s election on bitcoin. He has made several favourable comments about bitcoin as a monetary alternative to fiat, as he is a fierce critic of central banks and runaway money printing.
“We don’t expect a major short-term impact, however; he hasn’t made any policy proposals related to bitcoin. His central economic proposal is to switch Argentina to USD or a USD-pegged official currency, not bitcoin. Still, it’s safe to assume bitcoin (and potentially other cryptocurrencies) will have a favourable regulatory environment in Argentina under President Milei.”