Below are two charts, taken from the useful economics website www.latin-focus.com, that show the long-term trade balance evolution of Argentina and Brazil. Just to be annoying we have not labeled them with the country names but a more enigmatic “fig. one” and “fig. two”. The reason for this poor example of analytical clarity is to highlight the similarities of the state of play in the two countries (though the numbers on the scales should be a big enough clue; trade balance on left scale, imports and exports on right scale). All the same the evolution is pretty similar.
Both Argentina and Brazil have enjoyed good growth in the last 5 years. Both have exports as key policies to support the good times. But one major difference is the monetary policies the two countries have adopted. Brazil has not been afraid to let its currency float relatively freely, and as a result the Real has appreciated significantly against all world currencies in the last 5 years. Argentina has taken a different approach. Using aggressive Central Bank intervention policies, it has maintained its currency at an artificially low level. The mantra in Argentina all this time has been, “The low exchange rate is good for us. It helps exports.” Well tell that to Brazil; they continue selling goods to the world without too much hassle from a rising currency. The result is fig. 3 below, which shows the forex rates of the Real versus the Argentine Peso.
Since the Cristina presidency began, there have been no moves away from the weak peso policy. Currency reserves keep ballooning under the present policy of bank intervention, now standing at U$47.3Bn and up another U$15.2Bn since January 2007. There comes a moment when a country has enough “rainy day” reserves and Argentina has long-since passed that point. Maybe they are considering starting a sovereign wealth fund to buy up cheap real estate in the US? Or maybe they are keeping the Peso low to attract an influx of Brazilian tourists to keep growth going?
Joking aside and without beating round the bush much further, we submit that today’s Argentine peso is a knock-down bargain. We believe inflation (Argentina make-believes it was 8.5% in 2007, but it was likely around 20%) will become an even more serious issue in Argentina 2008 than it is already. Eventually the country will have to face reality and allow its currency to appreciate to stop growing consumer imports from fuelling the inflationary fire. This might upset the export sectors (mainly auto industry chiefs and soybean farmers who would have to settle for a less luxurious 4×4 this year if their dollars only bought P$2.80 and not P$3.14) but the critical point will be upon us soon enough, and the case of Brazil clearly shows that a stronger currency does not necessarily inhibit export growth. The alternative is that eventually George Soros or one of his acolytes will do the currency revaluation for them, and if that happened we confidently submit that the transition would not be as smooth as it might have been. One way or another, the free market has this nasty habit of eventually dictating true values. Fig. 3: Brazil Real/Argentine Peso Exchange Rate