Historic drought in Argentina risks currency reserves crisis

18 April 2023 Consultancy.lat 5 min. read
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A prolonged period of drought has led to a massive drop in Argentina’s agricultural exports, seeing US dollar reserves of the Central Bank of Argentina depleted to an alarming level.

Argentina is the world’s top exporter of soy oil and flour, and is third in corn exports. Along with Brazil and the United States, the country is a leader in producing soy, the most important source of protein for livestock like beef and chicken.

Drought is causing havoc in Argentina’s powerhouse agricultural sector however, with one estimate suggesting that around $19 billion inexport revenue will be wiped out from export value this year.

Historic drought in Argentina risks currency reserves crisis

The historic drought currently devastating Argentina’s crops is the worst felt in more than 60 years, with unusually high temperatures linked to climate change worsening the dry conditions. Harvests are forecast to be meager, which will unleash chaos on the economic state of the sector and the wider ecosystem.

With exports down, so too is the influx of US dollars, the main currency used for trade settlements in the sector. The low in the receipt of agricultural sector dollars is in turn putting pressure on the Central Bank of Argentina, which ensures dollars are available to businesses and traders involved in international trade and other financial transactions.

A report on the currency deficit from Argentine business consulting firm Ecolatina showed that the central bank’s net international reservesare currently less than $500 million. The report stated that Q1 of 2023 was the worst moment for the Central Bank since at least 2003, noting that reserves are at “a critical level.”

Running out of US dollars – also known as a ‘dollar shortage’ – can be a major issue for countries. According to data from the Bank for International Settlements, the dollar was on one side of 88% of all foreign exchange trades in 2022. In the Americas, that number is even 96%, owing to the instability of many local currencies.

Without US dollars, Argentina would run into difficulty funding its imports, with many of its key sectors (highly) reliant on imported goods and products.

Speaking to the Buenos Aires Herald, Ecolatina’s Lead researcher Santiago Manoukian said that the government’s strategy of avoiding devaluation and an abrupt currency correction is not working and that more challenges are likely to come in the short term.

“The failed route of reserve generation [from the agricultural sector] – which would in theory finance the deficit of other sectors of the economy – will further limit the possibility of a relaxation in import restrictions,” said Manoukian.

The depletion of currency reserves is being watched closely by central banks around the world, with the US Federal Reserve and major banks recently announcing proactive efforts to ensure US dollars remain available to the international financial system.

Argentina is not alone in its current dollar shortage threat. Several countries in Africa and the Middle East recently called for support ingaining access to larger supplies of US dollars.