Argentina’s currency devaluation plan, which involves a slow-and-steady devaluation of the peso against the dollar, is facing increasing pressure due to a historic drought. The drought has pummeled exports of cash crops, such as soy and corn, which are crucial to Argentina’s economy. As a result, the country’s reserves of dollars, which are needed to prop up the peso, are being drained.
The South American country has been controlling its official peso-dollar exchange rate through regular currency interventions. However, the cost of these interventions is rising, with $1.2 billion of hard currency sold in March alone, according to data from traders.
Argentina’s Drought-Induced Export Crisis
Argentina is one of the world’s largest exporters of soybeans and corn. However, a historic drought has severely affected these crops, with the soybean harvest projected to fall by 16% and the corn harvest by 9%. This has led to a crisis in Argentina’s export industry, with exports of these crops dropping by 33% and 50%, respectively.
The drought has also affected the country’s livestock industry, with many farmers forced to sell off their animals due to a lack of feed. This has further impacted the country’s exports, as meat exports have fallen by 22%.
The export crisis has had a significant impact on Argentina’s economy, which is heavily reliant on exports. The country’s GDP is expected to contract by 1.3% in 2021 due to the drought and the pandemic.
Pressure on Argentina’s Currency Reserves
Argentina’s currency reserves have been under pressure due to the country’s slow currency devaluation plan and the export crisis. The country’s central bank has been selling dollars to prop up the peso, but the cost of doing so is rising.
In March alone, the central bank sold $1.2 billion of hard currency, which is more than twice the amount sold in the same month last year. The bank’s reserves are now at their lowest level in four years, raising concerns about the country’s ability to continue supporting the peso.
Challenges Ahead for Argentina
The drought and the export crisis have created significant challenges for Argentina. The country’s slow currency devaluation plan, which was intended to improve the country’s competitiveness, is now facing pressure due to the rising cost of supporting the peso.
Argentina’s government will need to find a way to support the country’s economy and maintain its currency reserves in the face of these challenges. This may involve implementing new policies to support the agricultural industry and encourage foreign investment.
In the short term, the country may need to consider further devaluing the peso in order to make its exports more competitive on the global market. However, this could lead to inflation and further economic challenges in the long term.
Conclusion
Argentina’s slow currency devaluation plan is facing pressure due to the historic drought and export crisis. The country’s reserves of dollars are being drained, and the cost of supporting the peso is rising. The government will need to find new ways to support the economy and maintain its currency reserves in the face of these challenges.
