Tag: Argentina peso crisis

Except during the 2007 Global Financial Crisis, developing countries were the epicenters of global economic crises. Dependence on external capital, laxity in managing debt, faulty financial sector regulations - many of these contributed to crises in developing countries. Argentina is a classic case and interestingly, the Latin American economy goes through a crisis very frequently than any other of its peers. This is the second time in the last eighteen years that Argentina goes through a major economic crisis; the previous one was in 2002. The latest Argentinian crisis just reminds that the EMEs should not use external debt to finance budget blues. Macroeconomic data for Argentina shows the severity of the crisis. Last month’s inflation data indicate inflation touching 32% whereas the central bank increased interest rate to 60% to protect savers and to arrest capital flight. Peso, the currency has already lost 22% against the dollar. According to economists, the economy is expected to shrink by around 2% this year. More than anything else, Argentina need quick foreign exchange to survive a default and further currency crisis. It is waiting a planned injection of $50 billion from the IMF. What is special about this time around in the Argentinian economy? Simply, they resorted to too much external borrowing to finance their debt. Argentina’s fiscal deficit of 2.6% (2018) is a normal one compared to most emerging markets. For India, the fiscal deficit is 3.3% for 2018-19 budget. But the way in which the deficit in the budget is financed is important. Here, the Latin American economy resorts to external debt heavily whereas India 96% of budget borrowings comes from domestic sources. Argentina’s problems are largely structural. Any economy that depends on foreign debt to finance the unsustainable budget expenditure is inviting a balance of payment crisis. When the government delayed the understandably unpopular fiscal tightening measures, the dependence on external capital continued. The solution is clear- that Buenos Aires must revive the economy by undergoing painful austerity in the short run. Only development of domestic fund sources to finance social and capital expenditure will help the economy to stand on its own. *********

Tag: Argentina peso crisis

Argentina: the troubled asset of the emerging world

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