Which is Latin America’s Most Stable Currency?

Bloomberg Línea — Despite the fact that the United States is suffering from inflation and its currency is also depreciating, the dollar is not losing its strength as a benchmark currency.

In Guatemala, for example, buying a dollar bill costs practically the same as it did at the end of 2000, 7.68 quetzals 20 years ago, and 7.8 quetzals now, while in other countries of the region, such as Argentina or Venezuela, the local currency devaluations over the past 20 years have been phenomenal: the dollar went from being worth one Argentine peso to 143 pesos, while in Venezuela the local currency has lost 14 zeros.

Bloomberg Línea analyzed the performance of the region’s currencies between December 31, 2000 and September 12, 2022, to see which were the most stable, and which have devalued the most.

Guatemala’s quetzal, the most stable

The currency in the region that showed the least variation over the past 22 years is Guatemala’s quetzal.

The US dollar has gained just 1.5% against the currency since 2000, and over the past decade the US dollar has dropped 1.4% against the quetzal, which was trading at 7.9 quetzals to the dollar in 2012 and currently trades at 7.8 quetzals.

“Guatemala’s quetzal is managed under a flotation system and in general, it works according to supply and demand,” according to Guatemalan economist Ricardo Rodríguez of Call Center & BPO Industry.

“What happened is that throughout the last decade, and perhaps even more so since 2015-2016, is that, although the trade balance was in deficit, it was fully compensated with the inflow of remittances,” he said.

On the other hand, Rodríguez said the Guatemalan central bank has not sought to change the trajectory or trend of the exchange rate, but only to moderate its volatility.

“There is a discussion about whether an appreciated or stable currency supports the country’s economic purposes, when the currencies of the rest of the world have depreciated,” he said.

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The currencies of Bolivia, Peru and Paraguay hold their value

In the ranking of exchange rate stability in the 21st century, Bolivia is in second place in the region, where the dollar has barely risen 8.6% with respect to the Bolivian peso over the past these 22 years. In fact, the dollar costs just a few cents less in Bolivia than it did 10 years ago, closing the year in 2012 at 6.91 pesos and currently trades at 6.90 pesos.

This exchange rate calm has allowed Bolivia to lessen the impact of inflation. In fact, over the last year, during which price increases have accelerated in the region, Bolivia’s inflation rate barely exceeds 1.4% per annum, and is the lowest in Latin America.

Peru has also found a way to avoid major shocks to its currency, where the US dollar has only risen 9.42% since 2000 in relation to the Peruvian sol. Until the end of the last century, the currency was worth 3,525 sols and today its value is 3,883 sols.

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The conservation of the value of the local currency has made it possible to reduce the rates of dollarization of the Peruvian currency. The Central Reserve Bank explains: “In recent years, financial dollarization has registered a continuous reduction as the inflation rate has been reduced to levels similar to those of developed economies (...). The reduction of financial dollarization has been favored by the explicit inflation targeting scheme, since it entails a permanent, clear and credible commitment to maintaining the purchasing power of the sol over time”.

Paraguay has also managed to maintain a stable currency over the past two decades, although when compared to the end of 2000, the US dollar has appreciated almost 96% in the South American country.

However, such picture corresponds to a very specific moment and the truth is that the Paraguayan currency has been showing great stability.

If we take December 2002 as a point of comparison, we can see that in the last 20 years the Paraguayan guarani has appreciated by 2.9% against the US dollar. In other words, buying a US dollar today in Paraguayan currency costs, almost 3% less than it did two decades ago. In 2002, one US dollar cost 7,150 guaranís, and today its price is 6,936.

Venezuela: Constant devaluations

The political, social and economic crises that Venezuela has gone through over the past two decades have had a big impact on its currency, the bolivar, which has lost huge value.

Between 2007 and 2021, 14 zeros have been removed from the Venezuelan currency, as its devaluation has been attached to a process of transactional dollarization in the country. This process accelerated since the power outages that hit Venezuela in 2019 and reached a peak of 67% during 2021, dropping to 58.2% in 2022 with the introduction of the tax on large financial transactions.

Along the way, the bolivar was renamed ‘bolivar fuerte’ (’strong bolivar’) during the government of Hugo Chávez; ‘bolivar soberano’ (’sovereign bolivar’) in 2018; and in the last year it was replaced by the bolivar digital.

As of October 1, 2021, a new monetary policy was introduced in which, as explained by Vice President Delcy Rodríguez, “any amount expressed in national currency will be divided by one million. That is to say, 1 million will be equal to one bolivar, and 6 million will be equal to 6 bolivars”.

The digital bolivar will operate under this new value.

In addition, in a bid to maintain a more stable currency, the Venezuelan government launched in 2018 the Petro, a token backed by the country’s oil resources.

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Argentina’s peso among the weakest in the world

The Argentine peso is also among the weakest in the world, although without reaching the levels that afflict the Venezuelan currency,

If the official exchange rate is taken as a reference, since 2000 to date the US currency in Argentina has shot up by 14,127.45%, since it went from the convertibility regime that put the dollar and the peso at parity, to an official exchange rate of over 142 pesos at present.

However, taking this quotation is a benevolent view of the peso, given that practically nobody in Argentina can have access to the official dollar, except for importers. It would be more correct to take as a reference the free dollar, which is obtained from buying a bond in pesos and selling it in dollars. Taking that as a reference, there has been an exchange rate jump of around 27,000%.

Why has Argentina’s currency done so badly? Matías De Luca, an economist at consulting firm LCG explains: “Basically, the currency’s main problem is the lack of solid institutions, since politics always ends up prevailing over the economy and this manifests itself with a loss of the peso’s purchasing power, which is inflation, and with a devaluation of the currency”.

De Luca added that Argentina has shown a lack of capacity to commit to a long-term economic and monetary policy. “Moreover, the norm in Argentina is to have fiscal deficits. The only exception was the 2007-2009 period, which was a milestone in the country’s economic history,” he said.

Exchange-rate volatility in the region

Taking the two main economic powers in the region as a reference, the US dollar has doubled its nominal value in the region over the course of the century. The currency has risen 161% in Brazil since December 2000, having cost 1.95 reais at the end of 2000 and has a value of 5.09 reais now, and 106.15% in Mexico, having risen from 9.62 pesos to 19.84 pesos over the period.

The only countries in the remaining batch where the dollar has seen an appreciation below 100% in the last 22 years are Chile (a 56.5% appreciation since 2000), Honduras (63.4%) and Colombia (94.8%).

Likewise, in Uruguay the increase against the local currency was 225%; in the Dominican Republic, 231%; in Nicaragua, 178.6%; and in Costa Rica, 100.49%.

Some countries in the region have been operating with a dollarization of their economies for some time, such as Ecuador, El Salvador and Panama.

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