Argentina peso (ARS) could become the next Zimbabwe dollar

The Zimbabwe dollar is often seen as the poster child of bad macro and fiscal economic collapse. At its lowest moment, a 100 trillion Zimbabwe note was actually worthless. Today, these trillion-dollar notes are being sold in platforms like Amazon. 

The ZIM dollar collapse was attributed to the actions of Robert Mugabe, the then president, and the central bank. Facing heavy sanctions, the government turned to cash printing in a bid to fund its projects and welfare projects.

Cash printing leads to more money supply, leading to hyperinflation. At the worst period, Zimbabwe’s inflation surged to 3.13×109%, the highest on record. As a result, the middle class that existed decades ago disappeared and Zimbabwe became one of the poorest countries on earth.

Now, there are signs that Argentina, once a leading South American economy, is walking in the same footsteps as Zimbabwe. Like Zimbabwe, Argentina has consistently printed money to fund its ballooning deficit. In 2022, the country had a primary budget deficit of 2.4% while the financial deficit came in at 4.2%.

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Argentina cash printing continues

Argentina could now be heading into hyperinflation ahead of the general election. In a statement, the economy minister who is also a presidential candidate announced a series of handouts that could make the situation worse. 

All registered workers will receive the equivalent of $80 while informal workers and retirees will receive $125 and $49. The scheme will cost about 1.3% of GDP and will be funded by cash printing. Another handout will see the government raise the income tax threshold to 1% from the previous 7%.

Therefore, adding more Argentina pesos in an economy where inflation is soaring could lead to more challenges. The most recent data showed that the headline consumer inflation rose by 12.4% in August, the highest point since 1991 when the country was moving from hyperinflation. Inflation rose by over 124.4% on a YoY basis in August.

The challenge for Argentina is that it has no plan to exit this economic crisis. The ruling party is committed to continuing with the socialist policies that have brought it to its knees. On the other hand, the right wing candidate has pledged to get rid of the Argentina peso and replace it with the US dollar.

To a large extent, replacing the now-worthless Argentina peso with the US dollar makes sense. However, the reality is that implementing it will not be easy since the government needs to have resources to acquire the dollar.

It is hard to solve the Argentinian economy crisis. For one, solving the crisis would need to get rid of most welfare programs, raise some taxes, raise interest rates, and reduce the bureaucracy that reduces foreign investments. Scrapping these social programs would be unpopular.

Therefore, we can’t rule out a situation where the Argentina peso crashes hard in the coming months. The official USD/ARS has surged to 350 from 36 in 2018. The unofficial rate is much higher than the official one.

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