Milei teases Holy Grail of a free-floating peso

Argentine President Javier Milei may be about to achieve his biggest victory yet: the elimination of capital controls and the return of a free-floating peso. 

The zany economist—who embarked on what he’s called the largest austerity package in human history after assuming office 11 months ago—teased the policy shift earlier this week after the country’s statistics office reported that monthly inflation had fallen to 2.7% in October, the lowest level in almost three years. Argentina’s official exchange rate is currently being devalued at a fixed rate of 2% a month to move it closer to the weaker black market rate, and Milei said that could soon be cut in half before being completely eliminated.

“If we continue to see numbers like this for two more months, we’ll be able to bring the crawling peg down to one,” he said during a speech this week. “And if we can hold that level for three months, we’ll be freeing the foreign exchange market, liberating ourselves from currency controls and leaving this entire ordeal behind us.”

Milei said the programmatic devaluation was responsible for much of the current inflation and that consumer price increases would be closer to a monthly rate of 0.2%, or 2.4% annually, if the peso was at market equilibrium. While the gap between the black market and official exchange rates has narrowed over the past year, Milei has been careful to slow down the process to protect Argentines from a more abrupt devaluation. 

Asphyxiating currency controls have dogged the South American country over previous decades as it’s navigated one economic crisis after another, and any move to ditch them once again could remove a key stumbling block as Milei goes from cutting spending to trying to kickstart growth. Fitch Ratings has said that Argentina’s lengthy history of capital controls—which dates back to at least 1985—have heavily weighed on the companies it rates including Telcom Argentina (NYSE: TEO), Pampa Energia (NYSE: PAM) and YPF SA (NYSE: YPF).

Known locally as the “cepo,” the exchange controls have throttled companies by requiring exporters to quickly sell foreign currency at below-market rates to the government. Importers, in turn, have to wait for Central Bank authorization to buy what amounts to state-subsidized dollars. Venezuela is another example of a South American country famous for currency controls, and the corruption and stagnation they can foster. While that country has yet to completely relax restrictions, many credit the broader use of the US dollar informally as having been key to halting a complete economic freefall. 

Ethiopia free-floated its currency in July, ending a half-century of controls in a bid to ease foreign currency shortages, attract foreign investment and nab a deal with the International Monetary Fund for new funding. The birr—as the east African country’s currency is called—quickly lost 50% of its value compared to the US dollar, but Milei may be able to avoid a similar fate because his government’s crawling-peg has already closed much of the gap with the unofficial exchange rate. Argentina last removed currency controls under former President Mauricio Macri in 2015, although he ended up re-instating them once again in 2019. 

Milei has long been expected to try and restore a freely traded peso, but doing so in as soon as five months would be much faster than many analysts have expected and could help energize the business sector and boost growth. Indeed, traders of publicly listed companies in the country already seem to be salivating at the prospect. Shares of YPF, the state-controlled oil company, have surged 28% over the past month to bring yearly gains to 208%. The Global X MSCI Argentina ETF (NYSE: ARGT)—which tracks a broad basket of companies in the country—is up 87% over the past year, drastically outperforming country-themed ETFs that track Brazil (NYSE: EWZ) and Mexico (NYSE: EWW).

“We’re going to make Argentina the freest country in the world,” Milei told the crowd during his Tuesday speech. “In a few decades, we will look back on this period as the foundation of Argentina’s rise to global power.”

Milei has already proven that he knows how to cut spending, but he’s been careful to move more slowly when it comes to making other structural reforms to give Argentines a chance to adjust. With inflation coming under control, the Holy Grail of an unshackled peso may finally be in sight. How long it might last this time around will remain an open question.