Argentina’s Peso Under Pressure: A tightrope Walk for Milei
Argentina’s peso has been steadily losing value sence the recent vote in Buenos Aires, experiencing a significant 7% drop immediately following the results. This decline is placing immense strain on the government’s efforts to maintain the current exchange-rate scheme.
Economist Santiago Resico of one618 Group estimates that defending the peso within its established band until the upcoming elections would require a ample US$9.75 billion. This figure is considered prohibitively expensive, possibly forcing the government to alter its current approach.
President Milei’s central bank initially implemented a policy of controlled flexibility, allowing the peso to float freely within a band that expands by 1% monthly in either direction. This move was a condition of the lending agreement with the International Monetary Fund (IMF), and allows for direct intervention by monetary officials when the peso reaches the band’s limits – a situation that occurred last week.
However, even before the recent intensification of selling pressure, the administration had begun taking steps to bolster the currency. Over the past few months, Argentina’s Treasury has been selling US dollars, and the central bank has engaged in futures markets to stabilize the peso. Further measures included increasing reserve requirements to reduce the amount of pesos in circulation and restricting dollar demand from brokers.
Last Thursday saw a significant tightening of foreign exchange controls, with the central bank prohibiting shareholders and managers of banks from trading in financial dollars (MEP and CCL) for 90 days after purchasing currency on the official exchange market.
This shift represents a notable departure for Milei, who campaigned on a platform of free-market principles, including dollarization and the closure of the central bank. His promises of radical change initially attracted investors, contributing to a more than 100% return on the country’s debt last year, according to Bloomberg data.
Despite the current challenges, some investors remain cautiously optimistic. Reed of Ninety One has maintained exposure to local bonds, but has hedged against foreign exchange fluctuations, anticipating a potential devaluation after the election, given the likelihood of the government not securing a majority in Congress. She believes that even short-term, unsustainable policies are justifiable if they improve the administration’s electoral prospects, arguing the market is seeking evidence of a strategic adjustment.
However, the situation remains precarious. Country risk has surged beyond 1,500 basis points,the central bank has already spent over US$400 million defending the peso,and concerns are mounting regarding the government’s ability to meet its foreign exchange-denominated debt obligations in 2026-2027. With a return to international market access appearing increasingly unlikely, Milei’s economic team faces a shrinking range of viable options.
Adding to the pressure, Milei’s political rivals in the lower house of Congress have recently increased their opposition to his austerity measures, rejecting two vetoes related to education and healthcare spending. The Senate is expected to follow suit,potentially leading to increased government expenditure. These votes have further depressed the country’s assets, signaling potential difficulties for the latter half of Milei’s term.
resico notes that the market is already anticipating the expiration of the band regime after the October 27th election,a factor that diminishes its credibility with each passing day and makes it increasingly challenging to defend,irrespective of underlying economic fundamentals.
