After four months in office, the Argentine president, Javier Mileiseems to have achieved almost a miracle: has stabilized the country’s currency.
The irony is that this recovery of the peso occurs in his Government. During his presidential campaign, Milei had described the weight as “excrement” and promised that it would be completely eliminated.
The peso has not only stopped collapsing day after day but, in fact, in one of the many and intricate foreign exchange markets of Argentina rebounds strongly. The Argentine currency has soared 25 percent against the dollar in the parallel market in the last three months. It’s the biggest gain among any of the 148 currencies Bloomberg tracks.
It is a surprising fact in a country in which the currency seemed to suffer an endless free fall (the lowest annual depreciation in the last decade had been 15%). And it is the effect of Milei’s great efforts to curb public spending, stifle demand in the economy (even for dollars) and control inflation that had skyrocketed to almost 300% annually.
Milei uses his verbiage to describe his fiscal adjustment as “the largest in human history”. It could be an exaggeration, but not by much: its cuts add up to almost 4% of the country’s gross domestic product. The adjustment is so aggressive that central bank officials estimated it to be greater than 90% of all those carried out in the world in recent decades.
However, Milei’s heavy weight raises some red flags. On the one hand, spending cuts have plunged the economy into a deep recession. And analysts warn that as unemployment rises, political pressure for Milei to ease spending cuts will increase.. In addition, the president has had to resort to provisional measures to cut the budget because his reform package has encountered resistance in Congress. It is a sign of the little political support for his economic plan.
“The big news in Argentina is that the person in charge is not worried about paying the political cost of austerity, and that is unusual,” said Javier Casabal, head of research at AdCap Grupo Financiero in Buenos Aires. “The Government’s objective will continue to be to break the backbone of inflation.”
This also leads to the following major risk: that inflation does not go down as fast as the Milei team predicts.
This would not only fuel the unrest of Argentines, but would further increase the value of the currency in real terms. Since it began to stabilize in January, the peso has strengthened 72% taking into account inflation. Argentine investors closely monitor changes in the currency’s real purchasing power.
A strengthening currency is a positive sign for a country, but only until it begins to discourage exports and drive away tourists. And there are already those who speculate that this is starting to happen.
“When exporters stop selling, the parallel peso weakens,” he warned. Melina Eidnereconomist at PPI, a brokerage house in Buenos Aires.
For now, however, the currency is recovering. Some days it has strengthened up to 4%. Even in the official market, the market for most large import and export transactions, the peso remains almost stable. The authorities lower it slightly each day – about 0.05% – in a heavily regulated system designed to smooth out fluctuations.
Such is the stability of the peso that even the central bank has been able to buy dollars on the market every day to accumulate its meager international reserves. This reveals how decoupled Argentina is with world markets: most of the world’s central banks do, or consider doing, exactly the opposite to prop up their currencies against the dollar.
Critics say these market dynamics are because Milei has maintained the currency restrictions it inherited. But that does not fully explain why these regulations were not enough to stop the weight crash in the parallel market before the president came to power.
The difference is that Argentines, at least for now, show more confidence in the peso, and that slows down the demand for refuge in the dollar. And that, after fiscal adjustment, the central bank no longer has to print money to finance public spending, which interrupts a source of constant pressure on the currency.
“With this Government, economic policy is beginning to be rational,” says Carlos Pérez, director of the consulting firm Fundación Capital. But he also points out that many people who had converted excess money into dollars now must sell those dollars to pay for everyday items following the spike in inflation. “Their salaries are not enough“, said.
Milei triggered that spike in inflation in December by taking painful but, in his opinion, necessary measures to free the economy. He removed some of the price controls that kept inflation artificially low and allowed the official exchange rate to weaken closer to the parallel dollar.
The question is how long it can maintain this new stability. For Casabal, from AdCap, the situation should continue at least until July. Afterwards, he’s not so sure. He is concerned about politics and the pressure Milei could be under.
“Political fragility in Argentina,” says Casabal, “can disconnect you from the fundamentals and generate an exchange rate jump.”
