Argentine peso, ‘sworn to death’ by Milei, gains strength with measure…

Bloomberg — After four months in office, the president of Argentina, Javier Milei, seems to have achieved almost a miracle: it stabilized the country’s currency.

The irony is that this recovery of Weight occurred under his government. During his presidential campaign, Milei had called the peso “excrement” and promised to eliminate it completely, with its replacement by the US dollar as one of his main campaign slogans.

However, not only did the peso stop plummeting day after day, but also, in one of the country’s many complex currency markets, Argentinarecovered strongly.

The Argentine currency has soared 25% against the dollar on the parallel market in the last three months, the biggest gain among the 148 currencies monitored by Bloomberg.

read more: Why can the dollarization of the Argentine economy be beneficial for the country?

This is surprising data for a country where the local currency seemed to suffer an endless free fall (the smallest annual devaluation in the last decade was 15%).

This is the result of Milei’s great efforts to reduce public spending, restrict demand in the economy (including for dollars) and control inflation that had soared to almost 300% per year.

Milei uses his rhetoric to describe the fiscal adjustment as “the biggest in the history of humanity”. It may be an exaggeration, but not much: the cuts represent almost 4% of the country’s Gross Domestic Product. The adjustment is so aggressive that employees central bank they estimated that it would be greater than 90% of all those carried out in the world in recent decades.

Milei’s valued weight, however, raises some alarms.

On the one hand, spending cuts plunged the economy into a deep recession. Analysts warn that as unemployment rises, political pressure for Milei to ease spending cuts will also increase.

Furthermore, the president had to resort to provisional measures to cut the budget because his reform package faced resistance in Congress. This is a sign of little political support for his economic plan.

Read too: Milei’s team sees a greater decline in inflation in Argentina than expected by economists

“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 Javier Casabal, head of research at AdCap Grupo Financiero in Buenos Aires. “The government’s objective will continue to be to break the backbone of inflation.”

This leads to another big risk: that the inflation don’t fall as fast as Milei’s team predicts. This would not only fuel Argentines’ discontent but also further increase the value of the currency in real terms.

Since it began to stabilize in January, the peso has strengthened 72% when factoring in inflation. Argentine investors closely monitor changes in the real purchasing power of the currency.

O currency strengthening It’s a positive sign for a country, but only until it starts 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 in Buenos Aires.

For now, however, the currency is recovering. Within a few days, it strengthened by up to 4%.

Even in the official market, where most large import and export transactions take place, the peso remains almost stable. Authorities make it fall slightly each day — about 0.05% — in a tightly regulated system designed to smooth out the swings.

read more: In Argentina, appreciation of the peso and inflation reduce the number of tourists

The stability of the peso is such that even the central bank was able to buy dollars daily on the market to accumulate its meager international reserves.

This shows how disconnected Argentina is from global markets: most central banks in the world are doing, or considering doing, exactly the opposite to support their currencies in relation to the dollar, which has started to strengthen in the face of changing expectations about the beginning of interest rate cuts by the Fed in the United States.

Critics say these market dynamics are due to the fact that Milei maintained the exchange restrictions he inherited. But that doesn’t fully explain why these rules weren’t enough to stop the peso’s slide on the parallel market before Milei took power.

The difference is that Argentines, at least for now, show more confidence in the peso, which reduces the demand for dollars as a refuge. And that, after the fiscal adjustment, the central bank no longer needs to issue money to finance public spending, interrupting a constant source of pressure on the currency.

“With this government, economic policy is beginning to be rational,” said Carlos Pérez, director of the consultancy Fundación Capital.

But he also pointed out that many people who converted surplus cash to dollars now need to sell the U.S. currency to pay for everyday items following the rise in inflation. “Their salaries are not enough,” he said.

Milei triggered this increase in inflation in December by taking painful but, in his opinion, necessary measures to free up the economy.

He eliminated some of the price controls that kept inflation artificially low and allowed the official exchange rate to weaken to get closer to the parallel dollar.

The question is how long this new stability will last.

For Casabal, from AdCap, the situation should continue at least until July. After that, he’s not so sure. He worries about politics and the pressure Milei may be subjected to.

“Political fragility in Argentina,” said Casabal, “can disconnect you from the fundamentals and generate a currency jump.”

See more at Bloomberg.com