Argentina dollarization thoughts from briefing
......There has been a lot of talk lately about the need for dollarization in Argentina. Dollarization would have some immediate benefits, as it would remove the devaluation concerns that have led to a run on peso deposits. Once this obstacle is out of the way, lower interest rates will help to stimulate investment and perhaps more importantly, reduce the burden of debt service. The logistics of dollarization are also supported by the fact that since the inception of convertibility in 1991, peso and dollars have been used interchangeably on a 1 to 1 basis. In addition, the pronounced shift from peso-denominated to dollar-denominated deposits clearly suggests that the public is more comfortable with the dollar, a dynamic that eliminates any social backlash. Of course, dollarization also works when considering that reserves in Argentina exceed the monetary base.
While dollarization has some obvious benefits, we have our doubts about its ability to foster economic recovery. As far as we are concerned, the rigidity of the peso peg has been a major hindrance, particularly when considering the fallout surrounding the devaluation of the real in Brazil. Argentina's economy has contracted some 6% since the devaluation of the real, as domestic output has been crowded out by cheaper production platforms in Brazil. Of interest, more than 100 manufacturers in Argentina, including Ford and Fiat, have shifted operations to Brazil in an effort to protect profits in an increasingly competitive global economy..... |
