What is the real value of the peso?

[FrankPintor]

Call the peso 10,000/1 USD...it doesn't matter. [...] What's the point of international trade if all of it is a "threat" to domestic industry? Start digging a moat around Argentina and call it a day.

I hope you don't mind if I say that I don't think this was at the level of your usual thoughtful contributions.

In Argentina, we have the advantage of being able to observe a neighbouring, relatively open (10% tariffs on imports if I recall correctly), market economy. And Chile also has an independent central bank, with a floating exchange rate. So I'm reasonably sure that the Chilean Peso is appropriately valued, and that consumer prices in Chile are also appropriate.

So when Chileans flood into Argentina looking for bargains as in 2023, or Argentinians flood into Chile doing the same, like in 2024, the Argentinian Peso is not appropriately valued. You have a front row seat for all of this in Neuquen, I imagine. If it goes on like this, shops and businesses in the border area (50-100km from the border?) will close down, as everyone rushes past to shop in Chile. That's part of the "threat".

So I think that to remove the Cepo, at least an initial appropriate Peso value must be set, which doesn't make Argentinian businesses unviable overnight with cheap imports flooding in, and which also allows competitively priced exports. No moats. Later on the market will take itself where it wants to go, but getting the initial rate right, and defending it with conventional central bank tools, is critical.

 

[LuckyLuke]

I hope you don't mind if I say that I don't think this was at the level of your usual thoughtful contributions.

In Argentina, we have the advantage of being able to observe a neighbouring, relatively open (10% tariffs on imports if I recall correctly), market economy. And Chile also has an independent central bank, with a floating exchange rate. So I'm reasonably sure that the Chilean Peso is appropriately valued, and that consumer prices in Chile are also appropriate.

An astute observation. What's the poverty rate in Chile? What's the unemployment rate? As I mentioned earlier, it's not about what the government determines a "beneficial import exchange rate is". It's about the anti-dumping, trade quota, "in kind value" import restrictions that the government arbitrarily places on goods to "protect"..aka price fix state sponsored industry that keeps Argentina as a non-competitive expensive country.

"You have a front row seat for all of this in Neuquen, I imagine. If it goes on like this, shops and businesses in the border area (50-100km from the border?) will close down, as everyone rushes past to shop in Chile. That's part of the "threat"."

This is a common fallacy. What happens when you remove the competitive advantage of Chile's duty free clothing import? People don't drive anywhere. Instead we have this logic that 90% of Argentineans who don't live along the Cordillera must pay artificially high domestic prices to protect a small non competitive textile sector. What do you think 90% of argentines would do with the extra savings in their pocket from avoiding overpriced clothes? Surely not enjoy having more clothing stores down the street from them instead of going to a black market buying knock offs in BA? A store owner and employees can't possibly replace the value of a seamstress. Surely not spend the savings on another sector in the Argentine economy perhaps? Fine dining? Home remodeling? Perhaps basic nutritional needs. Instead of they are fighting for crumbs in an informal economy with low quality clothes. It's not difficult to see what cherry picking winners and losers like this is doing to this economy.

 

[Quilombo]

I think several people have made valid points. It's difficult to look at the value of the peso independent of the context of the larger Argentine macro economy where everything from bread to clothes to the dollar is distorted. The peso is currently overvalued/the dollar is planchado, and we're seeing this distortion via the carry trade (bicicleta financiera), the ridiculous cost of goods both imported and domestically made of domestic labor and domestic recourses, and prices vs. incomes more broadly.

You can currently print money buy selling dollars for pesos and parking them in a plaza fijo, and withdrawing them to buy dollars agin once you get the interest paid. For example, if the TNA is 45%, roughly 22.5% in 6 months, and the devaluation is only 2% a month, or 12% in 6 months, you're earning 10.5% in pure interest in 6 months adjusted for the devaluation. Add this to the fact that most Argentines earn less than $500 a month, food prices are the same as in the US and Europe, clothing prices are insanity/poor quality, and we now export Argentine wheat to Brazil and reimport it as bread because that's cheaper than bread made here and you start to see how this is all a symptom of a mismanaged kabuki economy in which the show's director changed from Massa to Caputo, but the show itself still goes on and very little has fundamentally moved towards market determination.

Milei ran on implementing a market economy, but despite his constant self/Caputo congratulations or at places like the IDEAS forum in MDQ it's just been a change in the winners and losers picked by the state. Now the winners are the owners of Edesur, the pre-paid health insurance companies, and private airlines, where before it was the fake factories in TdF "making" cellphones, aircraft importing companies, and Aero Campora. The losers in both situations were and remain Argentina and Argentines, but now it's more lopsided to the poor and working class, where before the losses were a bit more evenly distributed.

The major problem Milei and Caputo have is that nobody trusts them, least of all the market. For example, they like to say people can buy all the dollars they want via the MEP, but that's not the same thing as the BCRA dollar which exporters are legally forced to use via the MULC law to liquidate for a massive loss at. Even if you don't have export duties like soy does you're getting raked over the coals: let's say you provide digital services, you export every dollar for $964 pesos, and what, you're supposed to turn around and buy MEP dollars at $1,161.90 each? That's a 20.53% loss, but VLLC I guess because you can now do so via MercadoPago and give Galperin a cut...

But I digress. The peso is overvalued, everybody knows it, it's true value is likely at a minimum double the official exchange rate, but remains much lower because of government intervention, just like under the Ks.

 

[A Antares]

The value is whatever price someone in an FX exchange will accept to either buy or sell pesos for dollars. It has little or nothing to do with local inflation as Quilombo asserted. The price is eventually settled on the international exchanges.

 

[carride]

The value is whatever price someone in an FX exchange will accept to either buy or sell pesos for dollars. It has little or nothing to do with local inflation as Quilombo asserted. The price is eventually settled on the international exchanges.

True in many countries, though not here. The Argentina government does not allow pesos, dollars or any currency to freely flow in/out of the country. There are strict capital controls.

If you look at the historic value of the peso, you realize it is not a FX market based rate, but instead a closed government controlled rate.

US Dollar to Argentine Peso Exchange Rate Chart | Xe

USD to ARS currency chart. XE’s free live currency conversion chart for US Dollar to Argentine Peso allows you to pair exchange rate history for up to 10 years.

www.xe.com

 

[FrankPintor]

An astute observation. What's the poverty rate in Chile? What's the unemployment rate? As I mentioned earlier, it's not about what the government determines a "beneficial import exchange rate is". It's about the anti-dumping, trade quota, "in kind value" import restrictions that the government arbitrarily places on goods to "protect"..aka price fix state sponsored industry that keeps Argentina as a non-competitive expensive country.

Thanks for replying... I have no idea what the poverty or unemployment rates are in Chile. I though we were discussing exchange rates. The Chilean government (well, according to the Chilean constitution) doesn't determine a "beneficial import exchange rate". So I intuited that both their currency and the price of goods are probably valued appropriately (I did see that the Big Mac index disagrees somewhat, which may reflect the price of shipping stuff to a small country at the end of the earth). Their central bank can intervene, and I suppose does, to ensure some stability in the exchange rate, something that you would expect of a normal country. For all those reasons, I think Chile is a useful reference for us here in Argentina, the other neighbouring countries' currencies are too distorted, Uruguay is monstrously overvalued, forget about Bolivia, and Paraguay is a bit strange.

You have a front row seat for all of this in Neuquen, I imagine. If it goes on like this, shops and businesses in the border area (50-100km from the border?) will close down, as everyone rushes past to shop in Chile. That's part of the "threat"."

This is a common fallacy. What happens when you remove the competitive advantage of Chile's duty free clothing import? People don't drive anywhere.

I'm not sure it's a fallacy, a long time back I almost ran out of petrol driving from Germany to Luxembourg; no petrol stations in Germany from 50km to the border. Because cheap petrol in Luxembourg. Prices drive people's decisions.

Instead we have this logic that 90% of Argentineans who don't live along the Cordillera must pay artificially high domestic prices to protect a small non competitive textile sector. What do you think 90% of argentines would do with the extra savings in their pocket from avoiding overpriced clothes? Surely not enjoy having more clothing stores down the street from them instead of going to a black market buying knock offs in BA? A store owner and employees can't possibly replace the value of a seamstress. Surely not spend the savings on another sector in the Argentine economy perhaps? Fine dining? Home remodeling? Perhaps basic nutritional needs. Instead of they are fighting for crumbs in an informal economy with low quality clothes. It's not difficult to see what cherry picking winners and losers like this is doing to this economy.

OK, I didn't know we were talking about clothing, I imagined something more basic like cans of tuna. The whole damn market is distorted, but then again, we're talking about where we would like to go from here.