letting the peso off the leash | USAEMALL.com

Argentina’s libertarian president Javier Milei made a high-stakes strategy change this week, scrapping a currency policy that has underpinned his battle against inflation but unnerved investors.

Milei has relied in part on Argentina’s long-standing strict currency controls to tame chronic price rises. The central bank has dramatically strengthened the peso in real terms, but burned through scarce dollar reserves to do so.

Most analysts had expected Milei to stick to that strategy until crucial midterm elections in October because the inflation slowdown is central to his campaign. For months, he had appeared to be shrugging off investor jitters about the policy and planning only minor tweaks.

But, on Monday, Milei ripped off the bandage. Having secured an unexpectedly large $20bn loan from the IMF to replenish the central bank, he significantly loosened the controls, partially floating the peso and easing restrictions on Argentines purchasing dollars. 

Milei responded to surprise over the decision with trademark bombast. “I always promised that if I had [a lot of dollars] in my hand, I’d lift the controls,” he said in a radio interview. “How could I not if it means liberating Argentines? What does an election year have to do with it?”

His hand was at least partly forced by the central bank’s near-empty coffers. A peso sell-off in recent weeks had forced the bank to use more of its dollar reserves to defend the currency, increasing the risk of a destabilising official devaluation.

With the IMF’s backing, Milei has successfully relieved that pressure. The peso fell 6 per cent in the first week of its partial float, much less than economists expected and still far stronger than the central bank’s new upper limit of 1,400 to the dollar.

But maintaining that calm will be critical in a country where even small exchange-rate falls can stoke inflation because businesses are used to increasing prices to protect their margins. Most economists expect a small uptick in the monthly inflation rate in the short term, after a significant increase from February’s 2.4 per cent to 3.8 per cent in March.

“This is the big challenge,” said Cristián Buttié, director of pollster CB Consultora. “If we do see more inflation, can the government maintain the sense that things are improving? Or will a climate of doubt start to emerge?”

“For governments that live or die by people’s confidence, the latter can have uncontrollable consequences,” he added.

Seasonal factors are on Milei’s side in the coming months, with the country’s April-June soy harvest regularly drawing an influx of dollars to boost reserves. He has pressed exporters to sell their crops quickly by warning that a recent export tax cut will expire in June. And financial investors are expected to bring in dollars to carry out peso trades made lucrative by Argentina’s high interest rates.

Confidence in the central bank has been restored by an unusually large $12bn upfront disbursement from the IMF, plus the renewal of a $5bn loan from China, and a US pledge of “full support” from Treasury secretary Scott Bessent’s brief visit on Monday.

However, pressure on the exchange rate may increase after June as the October midterms approach, said Tomás Tagle, a strategist at Bull Market Brokers in Buenos Aires.

“Market actors in Argentina normally convert pesos to dollars before elections, and we can’t forget that many traders had been arguing the peso was overvalued” before Milei floated the currency this week, he added.

The economic strategy shift comes after a turbulent few months for Milei.

In February, the libertarian leader became embroiled in a scandal over his promotion of a memecoin whose value soared and then plummeted, sparking fraud allegations. Congress is preparing to launch an investigation into the debacle.

Then, this month, his attempt to install a controversial judge on the supreme court by decree ended in failure and frayed the president’s tense relationship with lawmakers.

Milei’s popular support has faltered slightly, from a high of 51.8 per cent in December to 46.1 per cent in March, according to CB Consultora, with support dropping in low-income areas where austerity and inflation bite harder.

The jumbo IMF deal “is Milei’s chance to relaunch after a significant bad spell”, said Sergio Berensztein, an Argentine political consultant.

The reset is urgent ahead of the midterms, where Milei is hoping to expand his tiny congressional minority into a force that can cement his reformist agenda into law.

Pollsters say Milei is likely to perform well, with the main left-leaning Peronist opposition struggling to come up with a message after its last government severely deepened Argentina’s economic crisis.

But the president has refused to strike alliances with natural conservative allies that would bolster his chances. This year’s first electoral test — a closely watched local vote in Santa Fe province last week — ended with the libertarians in a distant third.

A poor result in October would risk undermining confidence, among Argentines and financial markets, in Milei’s ability to maintain a floated currency and vanquish inflation.

The last attempt to lift currency controls was derailed by an unexpected victory for the Peronists in a 2019 pre-election poll, which spooked markets and triggered a run on the peso. Conservative president Mauricio Macri was forced to reinstate the controls soon after.

Milei’s scheme will face similar pressures, said Nicolás Dujovne, who co-led the economy ministry at the time alongside Luis Caputo, now Milei’s economy minister.

“Until a pro-market government is reelected in Argentina,” it will struggle “to withstand political shocks”, said Dujovne, who added he “celebrated” the president’s relaxation of controls.

“The challenge is to show results that improve peoples lives so they don’t want to change course,” he said.