(Bloomberg) — Four months after taking office, Argentine President Javier Milei has achieved a crucial feat in a country long plagued by runaway inflation: He has stabilized the currency.
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In fact, not only has the peso stopped falling day after day, but it is also recovering strongly in a key foreign exchange market – of which there are many here, a byproduct of the country’s web of Byzantine rules. The peso has risen 25% against the dollar in the past three months in the market known as blue-chip swaps, used by many investors and companies. That’s more than the gains of all 148 currencies that Bloomberg tracks against the dollar.
That’s a shocking statistic in a country where the currency appears to be in a never-ending state of free fall. (The smallest annual decline in the last decade was 15%.) And it underscores the efforts Milei has made to rein in bloated government spending, curb demand for everything in the economy, including dollars, and tame inflation has skyrocketed at an annual rate of almost 300%.
Milei likes to call his budget cuts “the biggest in human history.” He’s almost certainly exaggerating, of course, but not by much. The cuts he imposed amount to the equivalent of nearly 4% of the country’s economic output, an adjustment so drastic that central bank officials estimate it represents more than 90% of all cuts implemented worldwide in recent decades.
Read more: Milei sees a long road ahead to implement reforms in Argentina
To be clear: there are dangers everywhere for Milei and his strong peso policy. On the one hand, spending cuts have plunged the economy into a deep recession. And as Argentines, already suffering from inflation, lose their jobs, political pressure to scale back his fiscal program will increase, analysts warn. He has been forced to rely on stopgap measures to ease the budget because his broader reform package has faced opposition in Congress, a sign of how flimsy his economic plan is politically.
“The big news in Argentina is that the person in charge is not worried about bearing the political costs that come with austerity policies – that’s unusual,” said Javier Casabal, head of research at AdCap Grupo Financiero in Buenos Aires. “The government’s goal will continue to be to curb inflation.”
Which leads to the next big risk: that inflation won’t fall as quickly as Milei’s team imagines.
Not only would this anger Argentine consumers, but it would also further increase the value of the currency when adjusted for inflation. Since the peso first began to stabilize in January, it has risen about 72% adjusted for inflation, a measure that Argentine investors keep a close eye on because it measures changes in the currency’s actual purchasing power.
Read more: Milei’s team expects inflation to slow faster than the market expects
These profits are beneficial to a country until they reach the point where they discourage companies from exporting products and keep foreign tourists away. There are already rumors that this could start in some sectors.
“When exporters stop selling,” said Melina Eidner, an economist at PPI, a brokerage firm in Buenos Aires, “the parallel peso weakens.”
However, at the moment it continues to increase. On some days this year it is even 4%. Even in the official market, where most large import-export transactions take place, the peso is largely stable. In a highly regulated system designed to smooth out fluctuations, policymakers steer the value slightly lower each day – about 0.05%.
The peso is now holding up so well that the central bank has been able to intervene in the market daily to buy dollars and replenish critically low hard currency reserves. This is a tell-tale sign of how out of sync Argentina is with global markets. Central bankers across much of the world are currently doing, or considering doing, the exact opposite to support their currencies against the dollar.
Critics point out that some of Argentina’s supply and demand dynamics are due to Milei maintaining the currency restrictions he inherited. But those rules did little to slow the peso’s collapse under the previous government.
What’s different now is that Argentinians have more confidence in the peso, at least for the moment, dampening demand for the dollar’s safety. (This allowed the central bank to cut interest rates on Thursday for the fourth time since Milei took office.) Additionally, with the budget cuts, the central bank will no longer finance government spending directly by printing money, marking an end to a constant source of pressure for the currency .
Read more: Anarcho-capitalist Milei transforms into a pragmatist for China
“Under this government, economic policy is starting to become rational,” said Carlos Perez, director of advisory firm Fundacion Capital. In addition, Perez said, many people who had shifted their excess cash into dollars are now forced to sell those dollars back to get the pesos they need to pay for everyday items after the rise in inflation. “Their salaries don’t go far enough,” he said.
Milei triggered this inflation surge back in December by taking painful – but in his eyes necessary – steps to ease the burden on the economy. He removed some of the price controls that artificially depressed inflation and allowed the official exchange rate to fall toward the rate set in the blue-chip swap market.
That he is now overseeing a hot peso rally is an ironic turn for a man who had deemed the currency so worthless during the election campaign that he compared it to “excrement” and said it should be abolished entirely.
The question is how long he can maintain this newfound stability. It should be smooth sailing for AdCap’s Casabal at least until July. After that, he’s less sure. He’s worried about politics and the pressure Milei might come under.
“Political fragility in Argentina,” says Casabal, “can disconnect you from fundamentals and trigger a rise in the exchange rate.”
– With support from Patrick Gillespie.
(Adds Central Bank interest rate cut in 14th paragraph)
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