President Javier Milei achieved something in the past year that many considered impossible: he made Argentines fall out of love with the dollar — for now, at least.
For decades, Milei’s countrymen have preferred the US currency over the Argentine peso, the result of a never-ending series of inflation spikes that wiped out much of their local savings. So strong was demand for dollars among Argentines that they became a top holder of the greenback, only surpassed by US citizens and Russians, according to estimates by economists and former Central Bank officials.
But things have changed since Milei took office in December 2023. His government maintained currency controls and cut spending, turning the budget deficit into a surplus and thus removing the need for Argentina’s Central Bank to keep printing pesos.
Since then, the amount of pesos in circulation has dropped, and demand for dollars has weakened. The gap between the official peso exchange rate and that on the parallel market is narrowing, hitting less than 10 percent this week after widening to more than 200 percent before Milei came to power. The peso “ceased to be excrement,” economist Andrés Borenstein said, referencing a comment by Milei, who had described the local currency as such during the campaign.
Over time, the gap could shrink further, potentially allowing Milei to remove restrictions around foreign exchange, which prevent Argentines from buying dollars in the official market or sending them abroad. “This brings us a little closer each day to the definitive exit of capital controls, an aberration that never should have happened, and that with us, will end next year and forever,” Milei said in a televised address Tuesday to mark his first year in office.
Unorthodox methods
Further convergence between the different exchange rates could allow Argentina’s central bank to recover some reserves. Boosting those reserves is considered a key step by analysts to lift exchange controls.
To get closer to that goal, the government used some unorthodox tools.
– Milei upheld a rule forcing exporters to sell 20 percent of their dollars in the parallel market.
– In August, the Central Bank started selling foreign exchange reserves to buy bonds on a daily basis to manage the value of the parallel peso.
– Milei launched a tax amnesty, which brought in more than US $20 billion in cash. The additional dollar supply enabled investors, including companies, to take out dollar loans, sell the proceeds to the Central Bank in exchange for pesos and use those for carry trades.
– Donald Trump’s reelection in November provided another the Argentine leader with another reason for optimism. Milei has repeatedly highlighted his friendship with the US president-elect. He was the first foreign leader to visit Trump in Florida after his victory, and the Republican publicly called him “his favourite president.” Trump’s support could help the government’s push for new money from the International Monetary Fund.
So close, yet so far
Still, the return to a free exchange rate — which the country had from 2016 to 2019 — seems distant. One of the problems is the lack of reserves, which the Central Bank could use to defend the peso against devaluation risks that could come with a freely floating currency. The Central Bank currently has a US$5.8-billion deficit, which is set to increase in January, when Argentina has US$4.8 billion in debt coming due.
“The Central Bank has no reserves to get out of the restrictions. That has not changed,” said Fabio Rodríguez, an economist and managing partner of M&R Asociados.
High amounts of pesos held in Treasury and Central Bank bonds add to the challenge. The phenomenon, also dubbed ‘peso excess’ or ‘the money overhang,’ was driven by Argentine companies, which in recent years gobbled up these instruments as a means to store value. That has resulted in over US$100 billion in peso holdings, according to local brokerage PPI. Whether or not companies would unwind those holdings in a liberated currency market remains to be seen.
Come January, the Ventral Bank will have even less options to defend the peso. “They will be forced to use savers’ dollars if they wanted to support the current exchange rate,” said Gabriel Caamaño, economist and director at Outlier, a local consulting firm. The Central Bank counts deposits owned by individuals as part of its gross reserves.
That’s all to show that Milei’s recent currency progress might be short-lived. Recent changes in the official peso rate are making it more attractive for Argentines to spend their money overseas and dent inflows from overseas investors. The government’s current account surplus has turned negative again, hitting the highest level in a year at minus US$888 million in October.
Economists therefore don’t see an end to exchange rate restrictions until the mid-term elections in October, which Milei is counting on to gain more support in Congress. The government is unlikely going to “risk interrupting this economic moment, which is based on the drop in inflation,” said Melina Eidner, an economist at PPI.
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by Ignacio Olivera Doll, Bloomberg
