A coffee for $3.50: Argentina is the most expensive country in Latin America

Argentina’s President Javier Milei, towards the end of 2023, would often repeat that the peso, the national currency, “is worth crap.” He was campaigning for the presidency and still proclaimed dollarization and the closure of the Central Bank as the only possible remedy against inflation, which at that time was flying above 10% per month. A little more than a year later, Milei had reduced inflation to below 3% per month, but he did not dollarize, he did not close the Central Bank, and the peso is no longer “crap.” The formula applied by Economy Minister Luis Caputo was more orthodox: zero emission and exchange rate delay. That is, he gradually emptied the market of pesos and kept the dollar’s price at bay with an exchange rate that rises at a rate of 1% per month, in addition to setting up obstacles to the free exchange of currencies, the so-called “cepo.” The collateral damage of the strategy was a surge in prices when measured in dollars, because inflation in pesos, although it has fallen, has not been halted. Any foreign tourist passing through Buenos Aires can attest to this. Today, a cup of coffee in a bar in the Argentine capital costs the equivalent of about $3.5, compared to $1.5 in Bogotá or São Paulo or $2.5 in Mexico City or Santiago.

In a comparison of some everyday prices carried out by EL PAÍS journalists, Argentina is the most expensive country in the region. For an hour of parking, a Buenos Aires resident will pay $4.5 per hour, compared to $2 for a Mexican or Colombian. The pattern is repeated for a liter of top-brand milk or a can of Coca-Cola in the supermarket. The gap is especially wide for a midday menu in a downtown restaurant: $18 in Buenos Aires, compared to an average of $7 in the rest of the large Latin American cities. Prices soar even more in the case of clothing, cars, or electronics, sectors that in Argentina are heavily protected from external competition. This is not even compensated by the minimum wage, which is only slightly higher than that of Brazil and far below that of Chile or Mexico.

The immediate consequence of the rise in prices in dollars is that the upper and middle classes use credit cards to buy everything they can online from overseas, now that Milei has reduced tariffs and facilitated the entry of products from abroad. The beaches of Brazil and Uruguay were crowded with Argentines last summer, fleeing the prices of the resorts in their own country; there were also long lines at immigration points in Chile or Paraguay to go shopping at the malls on the other side of the border.

This is not the first time that Argentines have enjoyed a “strong peso,” as Milei now boasts, having found reasons to defend the revaluation of that “crap” of yesteryear. The economist Juan Manuel Telechea, a columnist for this newspaper, recalls that there were in the past “three important episodes of appreciation of the peso.” “In order of magnitude, we have that of the dictatorship in the 1970s, followed by the convertibility of the peso with the dollar in the 1990s and, finally and most recently, the one that occurred during the second term of Cristina Fernández de Kirchner and part of the government of Mauricio Macri. The latter ended with a 50% devaluation in 2018, after a financial bailout was requested from the International Monetary Fund,” he says.

Juan Carlos Hallack, an economist at the University of Buenos Aires and a researcher at the National Scientific and Technical Research Council (Conicet), warns that “there are very strong signs of exchange rate lag and whenever that has happened, external accounts ended up not being sustainable.” “Imports are going to increase a lot, due to the favorable relative prices, the elimination of taxes, and because many other tariff and non-tariff restrictions are being eliminated. That is good in general, but today it contributes to an even greater increase in imports. And with an exchange rate that is not flexible, the trade balance and the current account will worsen. This exchange rate is not sustainable, unless a lot of capital comes in to finance a growing deficit,” he says.

Milei says that sooner rather than later, this capital will arrive because the economy is going to take off and the activity will require large investments. In the immediate future, he expects the IMF to send an oxygen tank of about $12 billion to reinforce the Central Bank’s reserves, which are currently negative to the tune of $6 billion. Milei said in an interview on Monday that the agreement “only needs the ribbon” and that it will include “fresh funds.” He also took the opportunity to vehemently deny that Argentina has a currency lag.

Defending the exchange rate policy took up a good part of Milei’s week, as he was involved in a tough dispute with economists he considers econochantas (something like “not serious,” to use a polite translation). Over the weekend, the president published an opinion column in the newspaper La Nación in which he used technical arguments to deny that the peso is overvalued. “Naturally, under the current model there is no fiscal deficit, so it is not necessary to issue money to finance the Treasury, inflation is decreasing and reserves have increased,” he wrote. The underlying issue is to convince investors that Argentina will not experience a devaluation.

The fight with Cavallo, the father of convertibility

The academic tone that Milei chose for his Sunday column lasted less than 24 hours. In his crusade to defend his economic policy, the president clashed Monday with an unexpected enemy: Domingo Cavallo, the Economy Minister under Carlos Menem (1989-1999) and the father of convertibility. “He is a disgrace,” Milei said of the man he considered, until just a few months ago, “the best Economy Minister in Argentine history,” and a “hero” whom he dreamed of emulating.

It so happened that Cavallo had committed the sin of criticism. He maintained on his personal blog that, in his opinion, the real appreciation of the peso is around 20%, similar “to that which existed in the last three years of convertibility,” prior to the corralito crisis. “Real appreciation that led to a very costly deflation, because it transformed the recession that had begun at the end of 1998 into a true economic depression,” he added. As a solution, Cavallo recommended to Milei that the exchange rate restrictions be lifted in no more than three months, before the effects of the “strong peso” affect the national industry and discourage investments for export.

Milei picked up the gauntlet on Monday and attacked fiercely. “How is the dollar going to rise if I am taking away all the pesos that are floating around? The dollar has to fall like a piano. I am going to say this, especially to the unpresentable Cavallo,” he said during an interview. “This economic program is much more successful than convertibility because we did not have to have hyperinflation to do it,” he said, recalling the crisis that in 1989 forced President Raúl Alfonsín to advance the date of handing over power to Menem.

To complete his attacks, hours later Milei ordered the removal of Sonia Cavallo, the daughter of the former minister, as Argentina’s representative to the Organization of American States (OAS). “Her father is constantly sabotaging the economic program,” Milei warned, “and you can’t have your cake and eat it. You’re either on one side or the other.”

With additional reporting by Sonia Corona (Mexico), Naiara Galarraga Gortázar (Brazil), Rocío Montes (Chile) and Juan Esteban Lewin (Colombia).

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