The dollarization has been on the lips of many in recent weeks, especially among those who carefully observe what is happening in Argentina after the surprising victory – although, after the final scrutiny, by a smaller margin – of the candidate for president of the neighboring country, Javier Milei, In the elections Simultaneous and Mandatory Open Primaries (PASO).
While the establishment of the dollar as the national currency is one of its main proposals, and due to the closeness and close relationship that exists between both economies, it is worth asking what could happen in Uruguay If the libertarian economist is the one who will occupy the Pink House for the next four years, starting December 10.
“First of all, it is likely that among the options available to stabilize the Argentine economy, the dollarization —which seems unlikely—is the one that greater initial negative impact generates in the activity and the income”, explained to Ámbito.com the economist and manager of the Economic Analysis practice of CPA Ferrere, Nicolás Cichevski. “Under that assumption, in the short term (2024) Uruguay will face a situation similar to the one it faces today in terms of price differential and reduced demand for Uruguayan goods and services,” he added.
The current situation to which Cichevski refers is the important exchange difference that exists between Uruguay and Argentina, that becomes a price gap —a structural differential that is deepened by the devaluation in the neighboring country and the exchange rate delay with the strengthening of the peso that the local market experiences—mostly taken advantage of by the thousands of Uruguayans who, day after day, cross the border in search of lower prices. economic in goods and services.
The counterpart of this situation is the smaller number of Argentines who come to Uruguay, when the largest number of tourists that the country receives come from this country not only during the summer season, but throughout the year.
“On the other hand, to the extent that the economy manages to stabilize after the dollarization, it is feasible that the salaries in dollars begin to recover and the Argentine economy becomes more expensive, similar to what happened with convertibility. In that context, Uruguay could benefit from higher dollar income of Argentina and part of the loss of consumption that occurs today—Uruguayans who consume in Argentina instead of Uruguay- would be reduced,” Cichevski continued.
But the positive scenario would be too brief: “In the medium or long term, the dollarization exacerbates the external shocks, what you can add to it volatility at the level of economic activity (GDP) of Argentina, which can be transitive negative effects in Uruguay”said CPA economist Ferrere.
A more stable neighboring economy
For the researcher of Center for Development Studies (CED) Deborah Eilender“before dollarizing it is necessary to carry out a series of steps in search of stabilize the economy”. “There are certain conditions that the Argentine economy has to have in order to be able to change its currency. There are even some economists who say that if these measures are taken and those conditions are met, it would not be necessary to dollarize”, he considered, in dialogue with Ámbito.com.
Now, in case the dollarization actually happened, “Argentina I would end up having one currency that does not respond to the dynamics of its economy”. However, Eilender emphasized that this currency “is much more stable, with historically low inflation and clearly much lower than Argentine inflation.”
Therefore “by tying the Argentina to this currency they would also end up having a more stable economy themselves, and Uruguay “It would have a more stable economy next door,” the researcher considered, and stressed that it would also be more expensive.
He saw this as something positive, as did Cichevski: “With a Argentina most expensive Next to us, consumption by Uruguayans across borders could be expected to decrease. This difference between the blue dollar and the official dollar would no longer exist, which is what makes Argentina be so cheap for us. Simply put, its official currency would be the dollar without this great difference in prices, without these exchange gaps and it would be a little more expensive for us to cross to the other side of the pond to make purchases,” he explained.
Before dollarization, a unification of the exchange rate
The truth is that the debate on the dollarization It occurs at a particular moment on a global level, with a US currency that is just beginning to resume an upward trend after the general weakening it suffered in recent months; with China positioning itself more and more as a power in a multilateral scenario and, consequently, with the rise of the yuan as a currency for international transactions, and with emerging markets that they begin to make agreements to negotiate among themselves in local currencies.
Neither Uruguay neither Argentina They are alien to this situation. In fact, recently, the president of the Central Bank of the Argentine Republic (BCRA), Miguel Pesceand the owner of the Central Bank of Uruguay (BCU), Diego Labat, signed an agreement to expand operations between residents of both countries with local currency, which will allow payments for goods and services with Uruguayan and Argentine pesos. The dedollarization —a point strongly requested by the International Monetary Fund (IMF) in its annual evaluation—seems to be the current trend; In parallel, the dollarization is not emerging as a feasible possibility in the short term for the Argentina.
For this reason, the director of the Center for Studies of Economic and Social Reality (Ceres), Ignacio Munyoinsisted to Ámbito.com that, beyond dollarization, the most important thing for Uruguay “It’s how the bilateral exchange rate adjustment between the two countries before the new government”, while the exchange rate regime applied in the neighboring country is exchange rate parity.
The exchange rate unification in Argentina —of the official dollar and the parallel or blue dollar— is the most probable scenario—and even inevitable, as it is one of the IMF’s demands—that the economist foresees. “An exchange rate unification would naturally generate a recomposition of internal prices in Argentina that would make the price difference that exists today with Uruguay will continue to shrink over the course of next year,” said Munyo, agreeing with the other specialists consulted.
For his part, he also warned that, if shock policies To achieve this unification of the exchange rate, we will have to see “how quickly the internal prices”. In the best case, “Uruguay can hope” for a smaller price gap even during the upcoming summer tourist season.
Source: Ambito
