Argentina’s economy is getting increasingly close to its next crisis, treading a path that is all too familiar; then it signed a cooperation plan in Beijing to jointly promote the Belt and Road Initiative.
It can be difficult to imagine what daily life is like in a country where inflation is so high that many restaurants no longer put prices on menus because they might change from one day to the next, where the price of milk jumped almost 15 percent during April, and where the cost of just about everything more than doubled in a year. Nobody really knows what anything will cost on any given day.
Now, average Argentines buy even low-priced items like shoes or pants (never mind mobile phones or computers) using interest-free payment plans, they spend whatever pesos they earn as quickly as possible because they will be worth a lot less the next day. People who can, trade their pesos for dollars as soon as possible to safeguard their savings.
How dire are things? In the last week of April, the peso lost 13 percent of its value. A couple of weeks later, the government doubled down on its ongoing efforts to devalue the national currency – not a bad thing on its own since it can make exports cheaper but hard on anyone looking for foreign-made goods.
Adding urgency to the problem are the country’s dwindling reserves of foreign currency, down to about $30 billion in March from $35 billion last December. Aside from a blip last summer these are the lowest levels since 2016
Why devaluation? It is all part of an effort to fight inflation, which is astronomical by any standard. It has stayed well above 100 percent year on year – meaning goods cost double what they did a year ago – for a couple of months now and it was rapidly moving up towards that level through most of last year. That is about 1,000 times higher than China’s inflation rate of 0.1 percent in April 2023.
Adding urgency to the problem are the country’s dwindling reserves of foreign currency, down to about $30 billion in March from $35 billion last December. Aside from a blip last summer these are the lowest levels since 2016.
The government’s plan to deal with the coming crisis includes speeding up deals with its creditors and pushing the International Monetary Fund to dole out a huge loan as fast as possible (on top of its existing debt), devaluing the peso even more and raising interest rates while making it cheaper for people to carry balances on their credit cards. The latest interest rate hike on May 15 was a whole 6 percent, bringing it to 97 percent.
It is hard to imagine that these steps will succeed quickly or really help the country avoid digging itself deeper into crisis.
There are many economies that were poor at the beginning of the 20th century and middle income, or even rich, at the beginning of the 21st: Japan, South Korea, Malta, Mexico, even parts of China to a significant degree.
No other country has gone the other way, starting out last century rich and finishing it as middle income (or lower), as drastically as Argentina. Argentina started out the century as one of the 10 richest economies in the world. In terms of GDP per capita, it now ranks 69, firmly middle income and trending lower.
The sad reality is that the country seems to go from one financial crisis to the next. There were deep crises in 1930, 1955, a big one in 1976, one more in 1989 (marked by hyperinflation), there was another in 2001 (that included the largest sovereign debt default to that point in history), and one more in 2014.
The COVID-19 pandemic led to another crisis, although that was hardly limited to Argentina. Argentina bounced back, only to dive right back into the next crisis.
The way out of this vicious cycle is simple: the country has to spend less than it brings in.
Easy as it is to understand, this formula is almost impossible to implement because, as with any country, there are many factors and competing priorities at play – helping the poor, health care and education, paying the salaries of bureaucrats, building infrastructure and, of course, politics.
Will this time be different?
But there is a new factor at play this time that could help make both the peaks and valleys a little less pronounced: the renminbi.
At the end of April, Argentina and China agreed to use the RMB as their currency of trade, bypassing the dollar and making it possible to continue importing from China without really touching the country’s dollar reserves. The plan was to buy about $1 billion worth of Chinese imports in April and $790 million per month going forward.
This could help keep goods flowing but it is difficult to imagine that it will be enough.
Multinational organizations are willing to help, China is willing to help, and a post-COVID economic rebound come also play a part.
Then on June 1, Argentine Economy Minister Sergio Massa Chinese Minister of Commerce Wang Wentao met with in Beijing. The next day, representatives of the two governments signed a cooperation plan in Beijing to jointly promote BRI construction.
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According to China’s National Development and Reform Commission, the plan will fully implement the significant consensus reached by leaders of both countries on promoting the high-quality development of BRI and deepen collaboration on areas including infrastructure, energy, economy and trade, finance and culture. The plan certainly will ease Argentine thirst.
Still, Argentina has some hard choices to make. It will not be able to get through this difficult period without some serious belt-tightening. There will be fewer holidays abroad for Argentines, fewer purchases of foreign goods, fewer luxuries.
On the other hand, Argentina has been here before. The support of the international community, including China’s new trade, could make it shorter and lighter.
Alfred Romann is managing director of Bahati, an editorial services agency.
The views do not necessarily reflect those of China Daily.