The Argentine Inflation Problem B Y  

H A I L E Y ORDAL ON MARCH 19, 2018

In the final week of 2017, Argentina’s Merval index, the most important index of Argentina’s stock exchange, hit the 30,000
point mark for the first time in history, surging 77 percent in 2017 alone. Economic growth within Argentina appears to be
strengthening, and the Organization for Economic Cooperation and Development (OECD) is optimistic that Argentina will
continue to experience growth in its agriculture, manufacturing, retail and construction sectors in the near future. All of this is
welcome news, both for Argentina’s president, Mauricio Macri, and for the people of Argentina, as the country appears to
be emerging from recession. Yet despite this welcome news, the Argentinian economy remains beleaguered by one
particularly insidious force: high inflation.

According to Argentine daily newspaper La Nación, Argentina had the second highest rate of inflation in the entirety of Latin
America in 2017, ending the year with an inflation rate of 24.8 percent. The only Latin American country with an inflation rate
higher than that of Argentina was the catastrophic Venezuela, which experienced an inflation rate of 2,616 percent in 2017.
Argentina’s high inflation rate has plagued the country, leading to the deterioration of the Argentine peso vis-à-vis other
currencies while causing prices to soar, and must be brought under control if Argentina and its industries are to succeed on a
global scale.

High inflation wreaks havoc on economies via a rapid rise in prices, the erosion of the purchasing power of an individual’s
income, and the deterioration of the value of an individual’s savings. Argentina’s inflation woes stretch back decades. In the
mid-1970s, Argentina’s inflation rate shot up and averaged 300 percent per year for the next 15 years. In 1989, the  inflation
rate in Argentina hit a whopping 3,079 percent. In an attempt to cure the hyperinflation of the late 1980s, Argentina introduced
a currency board in 1991, under which the peso was pegged one-to-one with the U.S. dollar. In other words, as the dollar
appreciated and depreciated in relation to other currencies, the value of the peso would move with it. For a short period of
time, the currency board was successful and tamed Argentina’s high inflation levels. However, over the course of the 1990s, as
the dollar appreciated, Argentina’s currency board became overvalued, harming the country’s competitiveness globally and
plunging the country into recession. With the collapse of the dollar peg also came elevated inflation, and the currency board
was abandoned in 2001.

Inflation dropped to 10 percent in 2003, but it began to rise again during the presidential administrations of Nestor Kirchner
and his wife and successor, Cristina Fernández de Kirchner. Yet as the inflation rate became worse and worse, Argentina’s
government chose to deny it: when told in 2012 that the inflation rate in Argentina was 27 percent, Ms. Kirchner scoffed. “If it
were as high as they say it is,” the then-president retorted, “the country would explode.” During Cristina Kirchner’s
presidency, INDEC, the government statistical office in Argentina, began producing doctored inflation statistics that grossly
underestimated the true inflation rate and nearly destroyed the country’s relationship with the International Monetary Fund.
The Economist stopped printing the inflation statistics published by INDEC in its weekly issues.

Persistent high inflation has pushed up market interest rates, forcing Argentina’s government to pay an interest rate of around
25 percent to borrow in pesos. It has also destroyed Argentina’s mortgage market, forcing many Argentinians to pay upfront
(and often in dollars, given the peso’s volatility), in addition to diminishing private sector lending overall by causing interest
rates to skyrocket. Across low and middle-income economies, private sector lending constituted around 97 percent of GDP in
2016, and in Latin America, that number was approximately 49 percent. In Argentina, private sector lending  constituted a
mere 14 percent of GDP in 2016, giving Argentina one of the lowest rates in the entire world. This rate is on par with rates
seen in deeply impoverished countries, such as Zimbabwe (12 percent) and Haiti (18.3 percent).

Confidence in the Argentine peso faltered, and over the next few years, it dramatically dropped in value vis-à-vis the dollar.
Argentinians dumped the pesos they had and poured their wealth into U.S. dollars before their savings would wither away any
further – a practice that soon became largely illegal. President Cristina Kirchner instituted currency controls that made it
nearly impossible for Argentinians to purchase dollar assets. These currency controls had the unintended consequence of
making Argentinians poorer compared to savers in other countries, as they were being forced to invest in an asset that was
rapidly losing value. Upon the implementation of the currency controls, a black market for U.S. dollars quickly emerged in
Argentina. Known as the “blue market,” it enabled Argentinians to purchase dollars against the law, albeit at exorbitant prices.
In Buenos Aires, cuevas, or caves, popped up across the city to facilitate dollar purchases, and even the smallest cuevas would
handle $50,000 to $75,000 in transactions per day.

When Mauricio Macri was elected president in November of 2015, he soon embarked on a variety of much needed, albeit
painful, reforms to rehabilitate the Argentine economy. The former mayor of Buenos Aires quickly restored the independence
of INDEC, charging the agency with creating a new and accurate inflation rate. While the move restored credibility to INDEC
(The Economist began to publish INDEC’s inflation statistics again in 2017), it revealed how uncomfortably high Argentina’s
inflation rate actually was. Under President Cristina Kirchner, inflation in Argentina averaged around 10 percent per year
according to INDEC. Upon the election of Mauricio Macri, INDEC found that number to be closer to 25 percent.

President Macri also ended the Kirchner-era currency controls, once again allowing the peso to float freely. While this allowed
Argentinians to invest in more stable assets and freed Argentina’s exporters from the burden of an overvalued peso, it also
caused the value of the peso to decline further, and pushed inflation up to 40 percent in 2016. The day that the end to the
currency controls was announced, the Argentine peso fell by 29 percent against the dollar. 

President Macri’s economic reforms initially eroded his popularity, and by metaphorically “biting the bullet” and pushing
through the economic reforms that Argentina desperately needed, President Macri put himself and his party at great political
risk. In 2017, however, Argentina’s fortunes began to turn around. In July, the Argentine economy expanded by 4.9 percent,
and salaries began to rise. Furthermore, business confidence rose, the percentage of Argentinians living under the poverty line
fell, and inflation began to fall as well. President Macri and his “Let’s Change” coalition experienced a much-needed
popularity boost as well, with the coalition winning 41 percent of the vote in Argentina’s October 2017 midterm elections.
This electoral mandate encouraged the president to go ahead with work on reforming the tax code and reducing Argentina’s
budget deficit.
Overall, Argentina’s prospects are looking up. Argentina’s stock market had a banner year in 2017, and on February 20,
Forbes published an article titled “Is Argentina The New Darling Of Emerging Markets?” Yet persistent high inflation
threatens to derail Argentina’s economic recovery. The sooner its inflation rate can be brought back to a low, stable and
predictable level, the better.