Milei unleashes a free-floating peso with the promise of a new golden age
Argentine President Javier Milei has finally delivered on his promise to unshackle the peso from more than a decade of strict capital controls, and much faster than many thought would be possible. It’s a risky move that could stoke inflationary pressures and test support for his party ahead of legislative elections in October.
“From this moment, we’re eliminating currency controls from the Argentine economy forever,” Milei said in a national address late last week in which he described the measure as a final pillar of reform to bring fiscal, monetary and exchange rate order for the first time in 120 years. “After a tough first year of work, today we can declare the process of Argentine macroeconomic stabilization complete…we have removed the final thorn that inflicted deep pain.”
The announcement came just as Argentina reached an agreement with the International Monetary Fund for a fresh $20 billion loan to be disbursed over the next two years. Exchange rate liberalization had been seen as a key prerequisite for any new deal with the global lender of last resort—which had already bailed out the country 22 times before—and IMF managing director Kristalina Georgieva said the program represented a “vote of confidence” in the government after “impressive progress in stabilizing the economy.” Milei—who took office 16 months ago—has taken a controversial chainsaw to public spending, eliminating a fiscal deficit and bringing down triple-digit annual inflation back into double-digit territory.
Stocks rise as controls are relaxed
While previously heralding a dollarization that never materialized, the self-described “anarcho-capitalist” said a freed up peso would usher in a wave of foreign direct investment as people only put their capital at risk “when they know they’ll have full control over the returns.” Currency controls have haunted the South American economy on and off since at least 1985 and, in their latest iteration, resulted in multiple exchange rates and a black market for greenbacks that can foster corruption. Fitch Ratings has previously said that companies including Telecom Argentina (NYSE: TEO), Pampa Energia (NYSE: PAM), IRSA Inversiones y Representaciones (NYSE: IRS) and YPF SA (NYSE: YPF) were negatively affected by the restrictions.
“To all Argentines who work, who save, who are employed or self-employed, who run businesses, who take risks and invest—and also to those watching from abroad wondering if it’s worth betting on Argentina—I say: see this government as your ally. See it as a real opportunity,” Milei said. “Argentina will become the fastest-growing economy of the next 30 years.”
Markets seem to like what they’ve heard, and the Global X MSCI Argentina ETF (NYSE: ARGT)—which tracks a broad basket of companies in the country—is up 11% over the past five days, drastically outperforming the S&P 500 and country-themed ETFs that track regional peers Brazil (NYSE: EWZ) and Mexico (NYSE: EWW). Over the past year, the Argentine fund has seen a gain of 57% compared to a return of just 6% for the S&P 500, showing how the reform measures are playing out over time. Milei, in a separate interview this week, said the country was close to finalizing a free trade agreement with the US.
The risks ahead
That’s not to say there won’t be risks ahead. S&P Global had previously noted that the removal of exchange controls could lead to massive currency depreciation and boost inflation, which did tick up last month to the highest monthly rate since last August. The peso ended up declining 10% to 1,234 pesos per US dollar in the immediate removal of the capital controls, which suggests a somewhat measured response. Ethiopia, in comparison, ended a half-century of exchange controls in July, and the birr—as the east African country’s currency is named—quickly lost 50% of its value.
But then again the devil is in the details, and while much attention was paid to declines seen in the official exchange rate, on the black market the peso actually gained 7%. That means that anyone who had to visit one of the famous clandestine “cuevas” to purchase US dollars just saw the peso increase in value, and that should help blunt some of the inflationary pressure. Argentina’s central bank has also put in some guardrails, saying the peso will be allowed to float within a band—currently between 1,000 and 1,400 pesos per dollar—that will expand by 1% each month. Companies won’t be allowed to immediately repatriate earnings from previous years.
Milei, for his part, has spent months trying to get Argentines used to thinking of their currency as a store of value that can actually work, and he said on Friday that the country’s balance sheet could back up and support a much stronger peso. The so-called Big Mac index that measures prices of the McDonald’s hamburger at locations around the world, meanwhile, shows that peso could be undervalued. The famous sandwich currently costs around 7,400 pesos in Buenos Aires, or just about $6. In Miami, the price of a Big Mac is $6.83 at the moment, which means Argentines are getting a deal and backs up a thesis that prices might not rise as much as some expect.
Great expectations
“Inflation has no path forward but collapse,” Milei said, arguing that the phenomenon is strictly caused by excess supply—or money printing, as critics like to call it. On that front, recent data supports the belief that the country could be set for a breather.
“Except for the oldest among us, most Argentines have never seen anything like this,” Milei continued, describing the beginning of what he said would be a new golden age. “What all this means is that, by removing every historical risk factor that has made progress impossible for Argentines, we can finally begin to take advantage, as a country, of all the virtues and comparative advantages we already possess. All of our talent, all of our resources, all of our capacity for cooperation, our effort, and our ambition will now find a clear path forward, no longer blocked by the usual obstacles.”
Those are some bold statements, and classic discourse for the economist who likes to reference Milton Friedman, but the real test ahead will be turning will into power. In the days ahead, it will be just as important to watch for signs of new foreign investment as for continued progress in bringing inflation under control. Milei has finally achieved the holy grail of his reform agenda, and it is now time to see if the real world will live up to his great expectations—and if Argentines will trade those dollars under their mattresses for pesos that have historically done nothing but disappoint.
