Countries across Latin America are watching with weary eyes as the Argentine peso has fallen 20% in a space of one week, prompting stock markets to plunge in several emerging markets. The South American country is struggling to protect its dollar reserves as imports have risen while demand for mineral resources has declined in China.
The communist nation has long been a major source of export revenue for many countries across Latin America, but with China’s economy stuttering, these nations are wondering how to protect their currencies.
The plunging peso, analysts say, could hurt trade with neighbors such as Brazil, whose currency closed at a five-month low on Monday. Argentina is the biggest market for Brazil’s automakers.
The Argentine crisis unfolds just a day after Venezuela introduced a dual-currency system to reign in its currency. In September last year, a large amount of foreign capital flowed out of Argentina as investors chose to hide behind the safety of US sovereign bonds instead of risking their cash in volatile emerging markets.
Things worsened in the following months as demand for mineral resources decreased in China. According to Reuters, the peso is being traded on the black market at a discount of more than 40% on the tightly controlled official exchange rate. This is a amjor headache for Argentina, where inflation has already gone through the roof.
Earlier this year, Argentina announced a plan to tax goods purchased through foreign online retailers like Amazon. Now it has imposed a $2,000 limit on the purchase of US dollars. But analysts say the crisis will continue as long as the country pushes down inflation, which has risen above the 25% mark.
Increasing imports is likely to push the inflation to 30%t by the end of this year, leading the currency to devalue by another 50%. With the country’s key commodities — wheat and soybeans — declining in price, Argentina seems set to deal with a larger problem.