2024-07-21 04:00:24
Argentina’s liberal President Javier Milei’s plans to repair his country’s troubled economy are facing their first major test as his measures to rein in the peso have sparked a market backlash.
The government sets the official peso rate at regarding 960 to the dollar, but on parallel trading markets (both legal and illegal), the Argentine peso has fallen to an all-time low of nearly 1,500 per dollar this month.
The interest rate gap is seen as a key indicator of government confidence and can fuel inflation.
On Saturday, Milley unveiled a plan to stabilize the peso: The central bank will tighten its money-printing rules to reduce Argentina’s money supply and begin using its scarce foreign reserves to buy pesos on the parallel market.
“If I shut down all the printing presses, the problem is solved,” Milley told broadcaster LN+. “There is no panic, no panic at all.”
But investors do not seem to share this view. Last week, Argentina’s stock market fell as much as 12.3%, and dollar-denominated sovereign bonds fell as much as 11.3% before paring some of the losses. Critics say the new measures are too short-term and inconsistent.
The delay in the accumulation of foreign exchange reserves will slow the government’s plans to remove currency controls – a prerequisite for foreign investment and significant economic growth – and increase the chances that the government will default on more than $9 billion in foreign currency debt next year.
“they are [sacrificing the goal of building up reserves] and curbing exchange rate volatility — the latter of which no investor is worried regarding because it is a symptom of the problem, not the problem itself,” said Juan Pazos, chief economist at TPGC Valores, a financial services firm in Buenos Aires.
“Asset prices [are recovering] To some extent, these decisions start to undermine your confidence that the decision makers have the right priorities.”
Milley delivered on his most important campaign promise to “crack down” on Argentina’s public deficit in order to bring down sky-high inflation: monthly inflation plunged from 26% in December to 4.6% in June.
He believes that keeping the peso strong is key to curbing inflation.
But investors worry that controlling inflation at all costs would distract from other elements of Argentina’s long-term recovery: removing currency controls, accumulating reserves and accessing international capital markets.
“The government surprised markets with its inflation and fiscal success early on, but now there’s a sense that they are behind the curve — putting out fires instead of setting an agenda,” said Amilcar Collante, an economics professor at the National University of La Plata.
Analysts said the unconventional economic measures to support the peso will also put pressure on Milley’s recent negotiations with the International Monetary Fund over a possible new loan for Argentina, which already owes $43 billion.
Miley dismissed concerns regarding his economic plans and blamed Argentina’s banks for currency fluctuations.
Last week, he accused a bank of deliberately “destabilizing” the government by exercising put options — agreements that force the central bank to buy back its debt — and forcing monetary authorities to print pesos.
Economy Secretary Luis Caputo said Thursday that the government’s goal “has always been to reduce the number of pesos in circulation … Some people still don’t believe it.” [but] Reality will soon prove that… the peso will become a strong currency!”
With Argentina facing three straight years of annual inflation above 50 percent, Mr. Miley has made reducing price pressures a priority, halting previous governments’ policy of printing money to finance spending and pushing for an extreme austerity program.
Meanwhile, Caputo, a former Wall Street trader, has proposed a complex plan to clear billions of dollars worth of central bank debt held by local banks and curb the use of printed money to pay interest.
At the same time, Caputo has kept a tight rein on the peso’s official exchange rate, a major driver of inflation, by devaluing it by just 2% a month following a 52% devaluation in December.
Official data showed economic activity rebounded slightly in May, growing 1.3% from April, helped by agricultural and mining exports, but domestic sectors such as construction and retail sales continued to contract sizable chunks.
Milei believes controlling inflation is key to maintaining public support for his austerity policies. So far, his approval ratings have stabilized at around 51%, said Shila Vilker, director of the polling firm Trespuntozero.
But business leaders are increasingly complaining that Caputo’s policy of slow devaluation is hurting the competitiveness of exports.
“They should adjust the exchange rate and warn that inflation will temporarily rise … to improve the balance of the external sector,” billionaire property developer Edoardo Constantini told local television on Wednesday.
Sebastián Menescaldi, director of consultancy EcoGo, said businesses were concerned that the “contingency plan” measures presented in December had not yet given way to a longer-term roadmap to remove currency controls and restore growth.
“If the emergency measures last for more than three to six months, they start to become inconsistent,” he added. “Now the only way they can resolve these inconsistencies is to find a lot of dollars for the central bank over the next two months, otherwise they will have to devalue the peso.”
Sources of dollars are available, but tapping them is difficult. Argentina’s main source of foreign exchange is important agricultural exporters, but these exporters have so far been reluctant to sell their stocks due to low international commodity prices and an uncompetitive exchange rate.
According to calculations by Argentina’s Rural Association agribusiness lobby group, regarding $21 billion worth of exportable food is currently in storage.
An investment incentives package approved by Congress last month might attract dollars through the energy and mining sectors, while the government claims an upcoming tax amnesty will bring in regarding $1.5 billion.
Analysts say Argentina’s government will largely hope the IMF will agree to lend Argentina more money to help it get rid of currency controls, especially if Donald Trump — whom Milley described as an ideological ally of Argentina — wins the November U.S. presidential election and Trump is a major stakeholder in the fund.
But the government’s decision to use foreign reserves to prop up the peso will make a deal more difficult, as the IMF has criticized the move. Argentina is already the IMF’s biggest debtor and the recipient of the fund’s largest bailout in history.
“The government got into a corner and started taking actions that took it further away from its ultimate goal,” said Gabriel Caamaño, an economist at financial consultancy Ledesma.
He said the government had several options to restore momentum to its economic program, such as relaxing some small parts of the capital control regime to stimulate the market or taking steps to meet the International Monetary Fund’s requirements.
“It’s not too late to take some good steps to correct this,” he said. “This is not a tragedy yet.”
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