USD/ARS: Here’s why the Argentina peso has moved to the abyss

The Argentinian peso has become worthless, putting South America’s second-biggest economy at a substantial risk. According to TradingView, the USD/ARS exchange rate is trading at an all-time high of 350. The black market rate, which is what most people and businesses in the country use, has soared to over 700.

USD/ARS chart

Why the Argentina peso plunged

There are several reasons why the Argentina peso has plummeted to a record low. First, Argentina has long provided subsidies to its residents for decades. These subsidies have led to a massive budget deficit, pushing the government to borrow locally and abroad and print huge sums of money.

Second, unlike in most Western countries, the government is the biggest employer in the country. Public employment has risen by more than 34% from 2011. The implication is that most of the government’s tax revenues are going to public sector wages instead of development.

Third, Argentina has billions of dollars in IMF debt. The country owes the IMF over $33 billion, the biggest in the world. The challenge with IMF loans is that they must be paid in foreign currency, especially the US dollar. 

In a country where the Argentina peso has become worthless, getting access to dollars is a difficult thing. This explains why the country has defaulted several times.

Therefore, the government has imposed substantial foreign currency regulations that make it difficult for Argentina to attract foreign investments.

For example, soybeans exporters are required to pay a 33% tax, which removes the farmers’ incentives to farm. As a result, the most recent data shows that Argentina’s soybeans production has been falling.

Argentina also charges other companies that deal with US dollars huge taxes. This is one of the reasons why the country’s vast copper reserves are still not being exploited. 

Watch here: https://www.youtube.com/embed/18RTtDVghfw?feature=oembed

Can the ARS be saved?

All these factors have led to a general lack of confidence on the Argentian peso. Today, many people have shifted their savings to the safety of the safety of the US dollar. Many of them are using the black market to access these dollars and then saving them at home.

Therefore, without confidence, there is a likelihood that the value of the Argentina peso will continue plunging in the coming years. Currencies achieve their value from confidence among investors and residents.

At the same time, the leading presidential candidate has hinted that he will work to dollarize the economy and get rid of the central bank. These actions too will lead to more peso weakness.

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