Milei’s dollarization goals for Argentina could hurt Brazilian exports

The election of ultra-liberal, anti-system candidate Javier Milei, who promised true shock therapy to address the severe crisis in Argentina, is surrounded by uncertainties regarding how diplomatic relations with Brazil will unfold. A key element of his economic project, the dollarization of the economy in Argentina, if implemented, could hurt Brazilian exports, according to economists and industry analysts. The measure would make Argentine agricultural commodities like soy and beef more competitive in the international market.

The adoption of the US dollar as the official Argentine currency is the elected president’s weapon against inflation, which stood at 143% in the last 12 months until October—the highest level in 30 years. According to Antônio da Luz, Chief Economist of the State’s Federation of Agriculture (Farsul), Milei’s proposed dollarization for Argentina would require the end of the so-called retenciones móviles (taxation on exports of agricultural products) to encourage the influx of dollars.

“As soon as he puts an end to the retenciones, Argentina will start exporting more. Until the market adapts to the new environment, we’ll face a big competitor, a giant right next door, selling cheaper products. Imagine an Argentina with a full harvest to sell, without retenciones,” says Da Luz, adding that Milei’s victory could encourage an increase in crop areas for the upcoming summer cycle in fields where planting has not yet occurred.

Regarding Brazilian milk producers, who face difficulties due to increased imports of milk and derivatives from Argentina, Da Luz believes that a change of government could have a positive effect. This might lead the Brazilian federal government to impose some form of surcharge on items from the neighboring country. Argentine cattle farmers benefit from subsidies known as “Impulso Tambero,” which results in imported milk reaching Brazil at prices lower than its domestic counterpart. “What Argentina has been doing goes against Mercosur rules, but the Brazilian government pretended not to see it because it was engaged in Massa’s (Sergio Massa, defeated candidate) campaign. It may now decide to take action it should have taken in July,” says Da Luz.

See below the evolution of Brazilian containerized exports to Argentina up to September this year. The data used in the development of the chart below was gathered through DataLiner, the market intelligence service by Datamar.

Container Exports from Brazil to Argentina | Jan 2019 – Sep 2023 | TEU

Source: DataLiner (click here to request a demo)

Below are the imports via containers from Argentina. The data is also from DataLiner:

Container Imports from Argentina to Brazil | Jan 2019 – Sep 2023 | TEU

Source: DataLiner (click here to request a demo)

Argemiro Brum, a professor at the Regional University of Northwestern Rio Grande do Sul (Unijuí), notes that the dollarization proposal faces resistance both in the Argentine Congress, where Milei is unlikely to have a majority to approve it and in sectors of Argentine society. Another hardship in implementing the measure is the lack of dollars to replace the pesos. “That’s a technical issue. From the studies we’ve been able to follow, Argentina would need about 40 to 50 billion dollars in reserves, at a minimum, to start this process. And they may even have negative reserves,” explains Brum.

According to the professor, the dollarization of Argentina would impact not only Brazilian grain exports but also beef and wine exports. Brum points out that Argentina is the third-largest destination for Brazilian products, behind China and the United States. “I doubt that Milei will insist on this radicalism. He’s inheriting a devastated economy. His discourse is to boycott Mercosur and fight with (President) Lula and China. If he carries this forward, Argentina will be in chaos, and he probably won’t last long in office, maybe six months before facing strong opposition,” he predicts.

Economist Carlos Cogo, from the consultancy Cogo Intelligence in Agribusiness, highlights that Argentine agribusiness presented more than 14 proposals to presidential candidates, including exchange rate unification, the release of quotas and stocks for exports, and the end of retenciones, currently set at 33% for soybeans, 12% for corn and wheat, and 9% for beef. “Milei promises a gradual reduction and elimination of taxes within two years, which could run into the country’s fiscal crisis because eliminating taxes on agribusiness exports would mean giving up revenue,” the analyst noted.

According to Cogo, dollarization could stimulate external sales, as producers would not need to hold agricultural stocks for currency protection. However, implementing it in practice is challenging. “Milei’s election could bring less intervention in the exchange rate issue. Less exchange rate control could benefit Argentine agribusiness in terms of regaining competitiveness and increasing exports, but it won’t be automatic,” he assessed.

Source: Correio do Povo

Click here to read the original article: https://www.correiodopovo.com.br/not%C3%ADcias/rural/poss%C3%ADvel-dolariza%C3%A7%C3%A3o-argentina-impactaria-exporta%C3%A7%C3%B5es-brasileiras-1.1421802

Sharing is caring!