Might Argentina make the switch from the peso to the dollar?

CNN reports from London -

 Argentina saw Javier Milei win the presidential election on Sunday. His platform included plans to revamp the nation's economy, the second largest in South America, and exchange the Peso for the US Dollar.

 Will the proposals of the Libertarian Party be implemented?

 Milei's La Libertad Avanza coalition triumphed in the election with close to 56% of the ballots, surpassing the current center-left Peronist party and its chosen one, economy minister Sergio Massa.

 Sunday, Milei offered a victory speech that offered few specifics on the economic policies he plans to implement upon his December 10 inauguration. Although the self-proclaimed "anarcho-capitalist" used a chainsaw to represent his plans to reduce government funding on the campaign trail, he guaranteed drastic reforms.

 Milei proclaimed that the era of deterioration had finished and that there was no option of a return.

 He concluded by noting the need to put an end to the ruinous model of a state that is always present yet only serves the interests of a select few, while the rest of Argentina suffers. Furthermore, he acknowledged the difficulties he must face.

 We are faced with vast challenges: inflation, stagnation in the economy, a deficiency of real jobs, insecurity, deprivation and destitution.

 Milei's win has been met with approval from many sectors of finance, likely to lead to a total shift in economic management. He will have to address the soaring inflation rate of 140%, the dearth of foreign reserves, and the fear of another recession.

 On Monday, Argentina's dollar-denominated bonds increased, and the New York-listed stock of a few Argentine corporations skyrocketed. YPF, the state-owned energy provider, experienced a 40% surge, while the banks Banco Macro and Grupo Financiero Galicia saw a 20% bounce.

 Today, Argentina's financial markets are off due to a local holiday, yet in limited trading the peso experienced a minor depreciation, standing at about 353.58 to the US dollar. The peso has decreased 875% in relation to the US dollar in the past five years.

 Milei has committed to eliminating any controls on the currency and import limitations, which analysts suggest could lead to the peso's value declining further, mirroring the valuations seen in the informal trading markets.

 Gennari, a specialist from KNG Securities in Argentina, reported that the peso had weakened to $1,009 against the dollar on Monday on cryptocurrency exchanges, a noted downturn from the rates of $869 and $975 seen on the preceding Friday.

Issues Hindering Dollarization

 Milei, who was formerly an economist and a TV pundit, launched a campaign for the presidency on the platform of "breaking the status quo." His major promise was to "dollarize" Argentina, believing it to be the answer to the hyperinflation issue in the country.

 No other country has taken a step of comparable magnitude to Argentina, which is the third largest economy in Latin America after Brazil and Mexico.

 In Argentina, the process of dollarization implies that the peso would no longer be the currency, and instead the US dollar would be adopted. This would strip the country's central bank of its power over monetary policy and transfer it to the Federal Reserve of the United States.

 By taking such action, the central bank of Argentina would no longer be able to produce money, which has been used multiple times to aid the careless government in avoiding defaulting on debts, which in turn resulted in immense inflation.

 Javier Milei rejoiced in his triumph against Sergio Massa, economy minister of the country and the candidate for the presidency of the governing Peronist party, in a speech.

 It is widely believed that dollarization could be an effective way to reduce inflation, however, there is doubt that President Milei has the support from the public or the government to put this policy into action.

 William Jackson, an economist at Capital Economics, commented on Monday that he believes several of his more extreme suggestions, with dollarization being the most prominent, will likely not come to fruition due to a lack of backing among legislators and members of the public.

 He further stated that although dollarization could undoubtedly bring inflation under control, it would not be the answer to the nation's fiscal problems.

 Milei's victory speech showed a potential indication of his intent to obtain the backing of center-aligned groups, as he avoided speaking of dollarization or the previously discussed ideas of closing the central bank.

 Thierry Larose, a portfolio manager from Vontobel Asset Management in Zurich, declared that the likelihood of dollarization occurring in the near future is slim. Aside from the political obstacles, the unsteady condition of Argentina's economy makes it difficult for them to adopt the dollar, he told CNN, dubbing it a "terrible idea."

 At present, the exchange rate for the peso is unfavorable, which would cause the currency to become substantially weaker and likely lead to greater poverty, according to government statistics that indicate approximately 40% of the population is already impoverished.

 Larose stated that in order to sustain a sensible social and economic conversion rate, a minimum level of international reserves is required. At this moment, the government's foreign exchange reserves are over $10 billion in the negative.

 Larose commented that the progression to dollarization might be a positive for the economy.

 He mentioned that in order to dollarize, fiscal consolidation is necessary, as well as the suppression of hyperinflation and the buildup of foreign exchange reserves. Additionally, he noted that access to capital markets is also essential.

Is another debt restructuring possible?

It will be a while before Argentina is able to access international markets again. The IMF has blocked it from doing so while the nation repays its debts. Argentina is currently in debt to the Washington, DC-based IMF by around $44 billion, this was due to a significant bailout in 2018.

 On Monday, Kristalina Georgieva, the managing director of the fund, gave her congratulations to Milei on his election victory. She expressed her eagerness to collaborate with him and his government in order to create a powerful plan that will protect macroeconomic stability and foster growth for all Argentinians. This was stated in a post on X, a platform previously known as Twitter.

 Milei will require any and all assistance he can attain. According to the World Bank, the Argentine economy is projected to shrink by 2.5% in 2023, partially because of a disastrous drought, which is anticipated to cause an economic loss of $20 billion through declining agricultural exports.

 Jackson, of Capital Economics, believes the IMF will soon move away from their current leniency towards Argentina. He commented, "It's not certain that a debt restructuring will be requested yet, however, we appear to be moving towards that."

 Contributions to this report were made by Valentina Gonzalez, Stefano Pozzebon, Olesya Dmitracova and Reuters.

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