(Bloomberg) -- Javier Milei, the candidate, talked incessantly about how he would quickly shut down the Argentine central bank and adopt the dollar as the country’s currency. As president, Milei has decided he wants Argentines to do the job, gradually, on their own.
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The current approach — dubbed “endogenous dollarization” — entails curtailing the supply of pesos, forcing Argentines to use their dollars to pay for everyday expenses. Over time, that’s supposed to increase the amount of dollars in circulation and reduce reliance on the peso, which has lost 62% of its value since Milei took office.
“We aim to re-monetize the economy, both in pesos and dollars,” Economy Minister Luis Caputo said in a Sept. 20 speech. “We want people to use their dollars because that reactivates the economy, generates more revenue and allows us to lower taxes.”
Supermarkets, manufacturers and even bars have started accepting dollar payments, while banks and financial technology firms are developing payment methods using the US currency. “Dollarization is already underway,” says Emiliano Merenda, an executive at brokerage Win Securities. “The government is dollarizing the economy without most people realizing it. Every step it takes is aimed at getting dollars into the formal economy.”
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Dollarization Without Dollars
A key reason the government is doing what it’s doing is it doesn’t have access to dollars. Argentina has preciously few foreign reserves to spend, and its country risk stands at 1,284 basis points as measured by JPMorgan’s EMBIG Argentina Sovereign Index. That’s a far cry from other countries in the region, such as Brazil at 211 basis points, or Colombia, at 317 basis points.
Ten months into office, Milei is maintaining foreign exchange restrictions known in Spanish as cepo. They prohibit the purchase of foreign currencies by individuals and force exporters to sell their dollars to the central bank, which then hands them over to importers.
Milei doesn’t plan on lifting those restrictions any time soon. Instead, he is betting on a tax amnesty. The initiative, which industry insiders estimate has generated $10 billion of inflows so far, nudges Argentines to return as much as $100,000 per person to the formal economy by Oct. 31 to avoid penalties.
Baby Steps
Companies are already taking steps to dollarize. Diarco, a wholesale retailer, in August announced it would accept dollar payments at a rate that’s 40% higher than the official exchange rate. Other supermarket chains, including wholesaler Vital and Dinosaurio Group, have followed suit.
Patagonia Flooring, a manufacturer of floors and decking, said it accepts even dollars with stains or writing on it, according to a sign in one of its Buenos Aires stores.
Cabaña Don Theo, a meat-packing business in Esteban Echeverría near Buenos Aires, last month started taking dollar payments. “It’s a strategy to encourage consumption,” said Fernando Majeras, the owner of the company.
Fintech firms are also joining in. One of them, Cocos Capital, last week launched a virtual wallet that allows consumers to use dollars in their account to make purchases in pesos.
Greenbacks on the Move
As a result, the amount of dollars is starting to grow. Dollar savings held in Argentine bank accounts — at $28.8 billion — have gone up 82% so far this year, growing at a rate of more than $1 billion a day, according to government data. Still, they only amount to about 31.5% of the total, up from 25% at the end of last year. Dollar loans have doubled in volume, but continue to account for just 15% of the total.
For economists, there’s still a long way to go. “Yes, the economy is dollarizing endogenously, but very slowly,” Francisco Zalles, who specializes in this area, said in an interview. Zalles is part of a group of economists from Ecuador, which replaced its currency with the dollar back in 2000, that pushed Milei to transition more quickly, and officially, to the dollar. “Why put the Argentine economy through this pain?”
Some economists suggest taking cues from other countries with two currencies, such as Uruguay and Peru. “These countries have competing currencies and reduced their economy’s dependence on dollars,” said Marina Dal Poggeto, executive director at consulting firm EcoGo in Buenos Aires.
Back to Banks
Argentines owned a whopping $277 billion in untaxed funds during the first quarter, roughly ten times more than the pesos in circulation, according to official statistics.
Some of that money is moving to banks. Banks have opened around 200,000 dollar-denominated accounts in recent months, according to people with direct knowledge.
Argentina’s central bank in recent days permitted banks to issue debit cards in dollars, trying to steer proceeds of the tax amnesty into consumption and the economy more broadly.
(Im)possible Mission?
But, strict regulation prohibits banks from lending dollars to people who don’t have income in foreign currencies. Banks are forced to keep dollar reserves, leading them to hold on to two out of every three dollars in their deposits.
Bankers plan to ask Caputo to lower those requirements to increase lending activity using the US currency, according to people familiar with the matter.
Doubts Persist
Despite the recent progress, some businesses remain doubtful. At Diarco, dollar payments don’t make up large volumes yet, said Laureano García, the chain’s marketing director. “I don’t think the habit of paying in pesos will change substantially in the short term,” he said.
It will be hard to convince people to stop “using pesos and keeping dollars,” said Ariel Sbdar, the CEO of Cocos Capital. Fernando Majeras, the meat packer, agrees. “I don’t think Argentina will dollarize,” he said.
“Shock Therapy” is a weekly analysis column focused on finance and markets in Argentina.
--With assistance from Kevin Simauchi.
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