By Rodrigo Campos and Miguel Lo Bianco
NEW YORK/BUENOS AIRES (Reuters) – Argentina’s libertarian President Javier Milei rolled the dice this week on a major economic swerve, tearing down currency controls that had been in place for almost six years to protect the peso and avert an outflow of dollars.
So far his gamble is paying off.
The country’s long-suffering peso weakened more than 10% on Monday before stabilizing in the middle of a wide new trading band that replaced a tightly-controlled currency peg, but avoided the more messy and chaotic crash that some had feared.
The faster-than-expected lifting of FX controls – long promised by Milei and sought by investors – has got some on Wall Street waxing lyrical about the South American nation emerging from years of economic tumult, overspending and market distortion.
Milei “is moving full speed ahead toward cleaning up Argentina’s decades-old macroeconomic mess,” investment bank UBS wrote, heralding the lowering of controls and a linked $20 billion deal with the International Monetary Fund.
“The elimination of capital controls, and the strengthening of the fiscal anchor, have all surpassed even the rosiest analyst expectations.”
Milei, however, faces challenges ahead: getting sticky inflation down further, rebuilding foreign currency reserves that were deep in the red on a net basis, and winning over regular Argentines to even more austerity.
The IMF deal, under which $12 billion was disbursed up front on Tuesday, will bolster central bank reserves. But the country will need to build up some $4 billion on its own this year. Its reserve accumulation suffered a setback in recent months as the central bank sold dollars to protect an under-pressure peso.
Meanwhile, inflation that has come down sharply since Milei took office at the end of 2023, has proven stubborn above 2% each month. It jumped in February and could go higher after the abrupt weakening of the peso this week.
RUSH TO BUY DOLLARS?
On the streets of Buenos Aires, many regular Argentines were still wary about the peso, which has struggled for decades due to regular fiscal deficits, inflation and a lack of confidence among savers who have been burned by repeat currency crises.
“With all this talk about allowing a flotation, a supposedly free-floating dollar, well, it won’t last long,” said 61-year-old Gabriel Dome, who predicted people would try to hoard dollars now that strict limits were lifted.
“People will rush to buy whatever they can and there will be a shortage of dollars.”
Milei hopes that a tight domestic monetary environment, with little excesses of pesos amid the austerity push, as well as demand from farmers who need to swap their export dollar income for pesos, will bolster the currency.
That’s got analysts hoping for the best.
“We expect (the peso) to trade around the center of the band in coming weeks and BCRA (the central bank) should recover the lost reserves relatively quickly,” said Bank of America analysts in a note on Tuesday. “The parallel exchange gap should collapse.”
Indeed, the gap between the official FX rate and the widely-used parallel “blue dollar” narrowed to less than 5% on Tuesday from more than 25% last week.
Peso futures, however, suggest traders think that the peso will weaken further this year and draw closer to the upper edge of the trading band against the dollar.
NEW REGIME
Analysts are keeping a close eye on reserves accumulation and on opinion polls ahead of mid-term elections later this year. Milei remains popular for now, which is key to his tough medicine economic agenda.
“Going forward, besides the accumulation of reserves and the development of the new FX scheme, it will be key to monitor the reaction to inflation and its impact on Milei’s popular support on the road to the elections,” said analysts at BancTrust & Co.
The investment banking group said the new FX regime had got off to a “good start”, but cautioned that a weakening of the peso would likely be seen in coming months as the central bank tried to accumulate dollars.
Back in Buenos Aires, hardware store owner Gustavo Perez said the uncertainty and abrupt changes in the exchange rate had meant his deliveries have been haphazard and some suppliers were suspending sales or jacking up prices.
“What is dollar-based has increased 30%, what is locally priced has not, and the truth is that it is complicated for me,” he said. “I don’t know how to sell things because later I have to restock and I do not know at what price.”
Matias Quinteros, a 46-year-old worker, was more optimistic.
“I find the lifting of the currency controls very interesting,” he said. “Not only because of the stabilization of the dollar, but also because it supposedly brings in foreign investment. And I believe that’s very good for the country.”
(Reporting by Rodrigo Campos, Miguel Lo Bianco and Kylie Madry; Editing by Adam Jourdan and David Holmes)
Comments