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07.10.2019

Crisis in Latin American countries. What happened to Argentina in 2019?

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The currencies of Latin America, Argentine peso, in particular, have recently been quite unstable, and rapid changes were noticed by many traders who keep an eye on the market. Right now, Argentine peso is going through a rapid fall with severe ups and downs – too rapid even for a currency of high volatility. What could be the reason for such a roller-coaster?

Specifics of Latin American economies: background

According to the majority of economists and experts, the ground reason for inflation and devaluation of money is politics. Zimbabwe economic crisis of 1990ies, Venezuela crisis of the 2010s, even the Wall Street Crash of 1929 – all of them have a significant political base. 

The countries of Latin America are often affected by significant inflation. But why? The economist André A. Hofman named several reasons. He believes that the historical development of countries is one of the critical factors in nowadays development. Therefore, two important reasons for Latin American current state of affairs might be: 

  1. The economy of most Latin American countries is based on one primary exported product, and usually, those are nature-resource or agricultural products like coffee, corn, silver, etc.
  2. Throughout history, Latin American countries didn't have a strict and defined economic strategy and were mostly working under the force of circumstances. Moreover, usually, those circumstances involved the dependence on the foreign investments and political influence.

Primary products exported by Latin American countries are foodstuffs, coffee, cereals, animal meat, mineral fuels, etc. The major percentage of exported products is still agrarian: more than 52% in Argentina, about 39% in Colombia (based on OEC information). Therefore, the simplest reason for severe economic damage can be droughts, floods, rains… In other words, bad crops can hit the economy hard

Even though the countries are independent and are not considered colonies anymore, the Latin American countries economies are tightly connected to the foreign investments. For example, the USA is Mexico’s leading source country for foreign direct investment: in 2018, the States contributed $12.3 billion or 39% of all inflows in the country’s economy. The drop of the investments volume or even a possibility of such a course of events can seriously affect the stability of the national currency

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August-September 2019 in Argentina: what goes on?

On August 12th, 2019, the Argentine peso fell by 30% in just a couple of hours. It reached the lowest level of 65 pesos for $1. The MERVAL index, the most important index of the Buenos Aires Stock Exchange, fell by 31%. Governmental bonds took the same road. Thus, the national currency, stocks, and bonds – all of them crashed at once and altogether for the first time in 19 years.

The most plausible explanation that comes to mind first is political reasons. But as a matter of fact, it was a whole series of highly unpleasant events. If it were for just one or two of those events, the peso could’ve survived. But combined altogether, they turned out to cause a significant economic crisis. 

Let’s go through the possible reasons. First, as expected, comes politics. On August 11th, the primaries were held before the October 2019 presidential election. The events took a surprising turn. The current president Mauricio Macri got only 32% of votes, while Alberto Fernández, backed up by the former president Cristina Fernández de Kirchner, received 47%. 

Even though according to the Argentine electoral system, the primaries don't affect the final result of elections much, this state of affairs showed how far behind has Mr. Macri fallen. This became a serious ringing bell for investors, especially for those who remembered the Kirchnerism reign and the default of 2014 caused by Cristina Kirchner’s politics. 

So, the primaries leave investors with the following statement: the future course of the country is uncertain. Therefore, no certainty – no investments. 

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At the same time, the country is still in a food crisis. 2018 was the year of the worst drought in half a century – and this causes terrible harm to the economy of a country, where the major part of exported goods are food and crops. And although the farmers are predicting much better crops this year, a severe drought has already cut Argentina's farm exports, driving up its current account deficit. Thereby, the other factor is low crops – low export.

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Another reason why peso didn’t stabilize whatsoever became the Macri’s statements after the loss of primaries. He announced the plan to renegotiate the debts the country was dragged into, including those with the IMF. He also went for other serious measures to contain the country’s escalating financial crisis, but it seemed to fail. Peso went down again for almost a quarter. 

Argentina already owned $56 billion to IMF, and Macri requested $5.4 billion more to escalate the payment of the investment. And although the IMF agreed to “continue to stand with Argentina during these challenging times," this win was doubtful. Macri did what he was desperately trying to avoid – seek more financial help from the IMF. It turned out that a businessman like him was supposed to bring the country out of default, but technically led it back to it. Argentine citizens didn’t support him much on the primaries, because they expected him to overcome the crisis. Therefore, the third factor would be the failed expectations from a political figure. 

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What to expect next?

The previous president of Argentina, Cristina Fernández de Kirchner, left the country in a deep crisis and default of 2014. She became the president after her husband, Néstor Kirchner. During their reigns, inflation reached its highest pike, and the corruption became unbearable even for Latin American countries. No wonder investors didn't feel comfortable seeing her coming back.

Economic reforms by such a businessman as Mauricio Macri attracted investors other than the IMF, but unfortunately didn’t attract the citizens.  Those changes increased neither the Argentine people's quality of life nor the pace of economic development. And it led to the fact, that the same Cristina Kirchner who left the country in default now gets more support as a vice-president for Alberto Fernández than Mr. Macri. 

The majority of economists expects the Argentine peso to go further down, and their forecasts are far from bright. Most probably, the opposition candidate won't get the necessary support of the investors, and the country's debts might stay on the unsatisfying level.

What use is it for traders?

Argentine peso, Brazilian real, Turkish lira – those currencies go thought serious ups and downs due to their high volatility. The severe changes of these currencies’ rates cause critical changes on the market, and traders might get a significant profit on it. If you keep an eye on the political situation and use the fundamental analysis cautiously, you can earn on the currencies’ roller coaster.

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