South America’s two largest economies begin talks to create a common currency. Analysts are skeptical.
Brazil’s President Luiz Inacio “Lula” da Silva and Argentina’s President Alberto Fernández wrote in a joint article published in Argentina’s Perfil Sunday newspaper that they wanted to promote greater integration between the two neighbors.
The pair said they had “decided to continue discussions on a common South American currency that could be used for financial and trade flows to reduce operational costs and our external vulnerability.”
The announcement came as Lula visited Argentina earlier this month for his first trip abroad since taking office. At a news conference in Buenos Aires, he said adopting a common currency for trade would reduce dependence on the US dollar, whose sharp rise over the past year has been painful for countries around the world.
“If it was up to me, we would always have foreign trade in the same currency as other countries, so we wouldn’t have to rely on the dollar,” Lula said.
According to Reuters, Brazil’s Finance Minister Fernando Haddad downplayed the scope of the idea in talks with reporters. He stressed that Argentina’s US dollar shortage weighed on trade between the two countries and that leaders were exploring possible solutions, but that doesn’t mean the Brazilian real is on the way.
“Trade is really bad and the problem is precisely the foreign currency, right? So we’re trying to find a solution, something common that could make the trade grow,” Haddad said.
The two countries are both part of the Mercosur trading bloc, which also includes Paraguay and Uruguay. Since its inception in 1991, the creation of a common currency has been discussed regularly.
Win Thin, global head of market strategy at Brown Brothers Harriman, said the talks have now resurfaced because leftist Lula has more political ties to Fernández than his predecessor, Jair Bolsonaro.
Emerging markets were also hit hard by the strong US dollar, prompting complaints about its dominance of the global financial system. The greenback rallied nearly 8% against a basket of major currencies in 2022, making food and energy imports more expensive and increasing the cost of dollar debt servicing.
Still, investors doubt efforts to create a common currency will gain much traction in the region.
“I really don’t think it’s going anywhere,” Thin said. “It really seems like a bridge too far for Brazil and Argentina.”
Brazil, struggling with a sharp rise in interest rates, faces a sharp slowdown in growth this year. The World Bank estimates that its economy will grow by just 0.8% in 2023, compared to 3% growth in 2022.
But Brazil’s economic position has been much more stable than Argentina’s over the past two decades, Thin said.
“The credibility of central banks and institutions in Brazil is much stronger,” he said.
Argentina, which defaulted on its national debt for a ninth time in 2020, continues to be plagued by crippling inflation. Consumer prices in the country rose 95% in the 12 months to December. Efforts to get the situation under control have forced the country to reduce its foreign exchange reserves and limit business investment.
Hasnain Malik, Tellimer’s head of equity research, said in a research note that the different economic circumstances for the two countries would make it extremely difficult to get on the same page.
“Brazil and Argentina are a long way from the convergence in economic policies and performance needed for launch [a] monetary union,” he said.