Latin America’s most stable currencies in the last two decades

Although the United States is suffering from inflation and its currency is also depreciating, the dollar has not lost its strength as a world reference.

In Guatemala, for example, buying a dollar bill costs practically the same as it did at the end of 2000 (7.68 quetzales before and 7.8 quetzales now).

In others, such as Argentina or Venezuela, the devaluation was phenomenal: the dollar went from being worth ARS 1 to almost ARS 143, while the local currency lost 14 zeros in Venezuelan territory.

Bloomberg Línea analyzed the movements of the different currencies in the region between December 31, 2000, and September 12, 2022, to see which were the most stable and the worst performers.

THE QUETZAL, THE MOST STABLE

The currency that showed the least variation in these 22 years of the 21st century is the Guatemalan quetzal. In the Central American country, the dollar barely rose 1.5% if we compare the exchange rate at the end of 2000 with the current rate.

If you look at the last decade, the dollar in Guatemala today costs 1.4% less than what it cost at the end of 2012; it cost 7.9 quetzals and now 7.8 quetzals.

“The quetzal in Guatemala is managed under a managed floating system, and in general, it works under supply and demand,” explained Guatemalan economist Ricardo Rodriguez from Call Center & BPO Industry.

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

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

In any case, Rodriguez concluded: “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”.

BOLIVIA, PERU, AND PARAGUAY: CURRENCIES THAT RETAIN THEIR VALUE

In the ranking of exchange rate stability in the 21st century, Bolivia is in second place: the dollar has barely risen by 8.6% compared to the Bolivian boliviano in these 22 years.

The dollar costs a few cents less in Bolivia than it did ten years ago: it closed at 6.91 bolivianos in 2012 and now trades at 6.9083 bolivianos.

This exchange rate calm allows Bolivia to appease the onslaught of inflation. In fact, in this last year, in which price increases have accelerated in the region, Bolivia’s inflation rate barely exceeds 1.4% per year and is the lowest in Latin America.

Peru has also found a way to avoid major shocks to its currency. Thus, the dollar has only risen 9.42% since 2000 compared to the Peruvian sol. Until the end of the last century, the currency was worth 3,525 soles; today, its value is 3,883 soles.

The conservation of the value of the local currency has made it possible to reduce the dollarization rates 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 maintain the purchasing power of the sol over time”.

Paraguay has also managed to consolidate a safe currency in the last decades, although to include it in this lot, it is necessary to clarify that an exception was made: if compared to the end of 2000, the dollar appreciated by almost 96% in the South American country.

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

If we take December 2002 as a point of comparison, we can see that in the last 20 years, the guaraní has appreciated by 2.9% against the dollar.

In other words, buying a US dollar today in Paraguayan currency costs, nominally, almost 3% less than it did two decades ago (a dollar in 2002 cost 7,150 guaraníes, and today its price is 6,936.2 guaraníes).

VENEZUELA AND ARGENTINA: A CONSTANT WEAKENING

The political, social, and economic crisis that Venezuela has gone through in recent decades has greatly impacted its currency, the bolivar, which has lost immeasurable value.

Between 2007 and 2021, 14 zeros were removed from the Venezuelan currency. Its devaluation has been attached to the country’s transactional dollarization process.

This process accelerated after the power outages that hit Venezuela in 2019 and reached a peak of 67% nationwide in 2021. Then dollarization e reduced to 58.2% in 2022, with the new Tax on Large Financial Transactions.

Along the way, the historic bolivar was renamed bolivar fuerte during the government of Hugo Chávez; bolivar soberano in 2018; and in the last year, it was replaced by bolivar digital.

On October 1, 2021, the New Monetary Expression came into effect whereby, as explained by Vice President Delcy Rodríguez, “any amount expressed in national currency will be divided by 1 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 works under this new expression.

In addition, to have a more stable unit, in 2018, the Venezuelan government launched the Petro, a token backed by the country’s natural resources.

The Argentine peso is among the worst in the world without reaching the levels that afflict the Venezuelan currency.

If the official exchange rate is taken as a reference, from 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 1 to 1 to an official exchange rate of over ARS 142 at present.

However, taking this quotation is even a benevolent view towards the peso, given that in Argentina, practically nobody can have access to the official dollar except importers.

It would be more accurate to take as a reference the free dollar, which arises from buying a bond in pesos and selling it in dollars (called the MEP dollar). With such reference, we would observe an exchange rate jump of around 27,000%.

Why has Argentina’s currency done so badly? Matías De Luca, an economist at the consulting firm LCG, explains:

“The currency’s main problem is the lack of solid institutions since politics always prevails over the economy. It is manifested with a loss of the peso’s purchasing power, inflation, and currency devaluation”.

De Luca added that the country could not 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, a milestone in the country’s economic history,” he stressed.

EXCHANGE RATE VOLATILITY IN THE REGION

Taking the two leading economic powers in the region as a reference, we observe that the dollar has doubled its nominal value in the region over the century.

The currency has risen 161% in Brazil since December 2000 (it cost R$1.95 at the end of 2000 and R$5.09 now) and 106.15% in Mexico (from 9.62 pesos to 19.84 pesos).

The only countries in the remaining batch where the dollar appreciated below 100% in the last 22 years were Chile (56.5% since 2000), Honduras (63.4% in the same period), and Colombia (94.8%).

Likewise, in Uruguay, the increase 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 de jure dollarization for some time, such as Ecuador, El Salvador, and Panama.

With information from Bloomberg