After four months in office, the Argentine president, Javier Milei, seems to have achieved almost a miracle: has stabilized the country’s currency.
The irony is that this recovery of the peso occurs in his Government. During his presidential campaign, Milei had described the peso as “excrement” and promised it would be removed completely.
The Argentine peso is the currency that has appreciated the most in the last three months
Not only did the peso stop collapsing day after day but, in fact, in one of Argentina’s many intricate foreign exchange markets, rebounds strongly. The Argentine currency has shot up 25% against the dollar in the parallel market in the last three months.
It’s the biggest gain among any of the 148 currencies Bloomberg tracks.. All months after, as a candidate for La Libertad Avanza, Milei called on people not to save in Argentine pesos.
“Never in pesos. The peso is the currency issued by the Argentine politician, therefore It cannot even be used as excrement, because that garbage is not even useful for compost.“He commented in an interview.
This is a surprising fact in a country where the currency seemed to suffer an endless free fall (the lowest annual depreciation in the last decade had been 15%).
And such news is the effect of Milei’s great efforts to curb public spending, stifle demand in the economy (even for dollars) and control inflation which had skyrocketed to almost 300% annually.
The “grandiloquence” of Javier Milei’s speech
Milei uses her verbosity to describe its fiscal adjustment as “the largest in the history of humanity.”
It could be an exaggeration, but not by much: its cuts add up to almost 4% of the country’s gross domestic product. The adjustment is so aggressive that central bank officials estimated it to be greater than 90% of all those carried out in the world in recent decades.
However, Milei’s heavy weight raises some alarms. On the one hand, spending cuts have plunged the economy into a deep recession. And analysts warn that as unemployment rises, political pressure for Milei to ease spending cuts will increase.
Furthermore, the president has had to resort to provisional measures to cut the budget because his reform package has encountered resistance in Congress, in a sign of the little political support for his economic plan.
Fighting inflation
“The big news in Argentina is that the person in charge is not worried about paying the political cost of austerity, and that is unusual,” said the head of research at AdCap Grupo Financiero in Buenos Aires, Javier Casabal. “The Government’s objective will continue to be to break the backbone of inflation.”
This also leads to the following major risk: that inflation does not fall as quickly as the Milei team predicts.
This would not only fuel the unrest of Argentines, but would further increase the value of the currency in real terms. Since it began to stabilize in January, The peso has strengthened by 72% considering inflation. Argentine investors closely monitor changes in the currency’s real purchasing power.
Always a good sign?
A strengthening currency is a positive sign for a country, but only until it begins to discourage exports and drive away tourists. And there are already those who speculate that this is starting to happen.
“When exporters stop selling, the parallel peso weakens,” warned Melina Eidner, an economist at PPI, a brokerage house in Buenos Aires.
For now, however, the currency is recovering. Some days it has strengthened up to 4%. Even in the official market, the market for most large import and export transactions, the peso remains almost stable. Authorities lower it slightly each day – about 0.05% – in a heavily regulated system designed to smooth out fluctuations.
Such is the stability of the peso that even the central bank has been able to buy dollars on the market every day to accumulate its meager international reserves.
This reveals how decoupled Argentina is with world markets: most of the world’s central banks do, or consider doing, exactly the opposite to prop up their currencies against the dollar.
