Argentina is experiencing mounting pressure on its currency, the peso, as investors anticipate challenges following President Javier Milei’s sharp devaluation of the currency by 54%. The market sentiment is showing signs of turning sour on Milei’s initial economic moves, with concerns about the sustainability of his policies. As Milei’s economic team meets with the International Monetary Fund (IMF) to reset the nation’s $44 billion program, the peso is weakening in parallel markets, hitting a fresh low and risking further inflation, which already exceeded 200% last month.
Milei’s early measures included a significant peso devaluation and the removal of price controls on numerous products, leading to rapid price increases. Despite the surge in inflation, the central bank changed its monetary policy tool, aiming to lower borrowing costs by cutting interest rates from 133% to 100%. This move was intended to free up pesos for local banks and boost demand for treasury notes.
However, concerns are emerging about the sustainability of the central bank’s proposed 2% monthly devaluation of the peso, considering the high inflation rate. Analysts anticipate growing pressure on the exchange rate, with expectations that investors may shift to dollarizing their portfolios.
Local investors are already turning to US dollars, as reflected in the weakening parallel rate, reaching 1,070 per dollar, compared to the official rate of 811. The reduction in interest rates has also impacted 30-day bank deposits, a common savings instrument in Argentina. This has led to the withdrawal of funds from deposits into checking accounts, contributing to increased peso liquidity and posing a risk for inflation.
While the IMF initially praised Milei’s initial moves, concerns about the peso’s potential losses are reigniting currency policy debates. Exporters and importers tied to the official exchange rate are cautious, with exporters selling less and importers avoiding government bond auctions.
The recent challenges mark a shift from the positive tone observed in Milei’s first weeks in office, characterized by a rally in sovereign bonds and calm in currency markets. The central bank took advantage of this period to bolster foreign reserves by $3 billion, providing temporary relief as the country faces approximately $1 billion in interest payments due to bondholders in the coming week.
As uncertainties loom, analysts predict a potential weakening of the parallel peso in the coming months, necessitating another sharp devaluation by the central bank to navigate exchange restrictions. However, this move could contribute to further inflationary pressures.
