Argentina peso devalued over 50% as markets welcome Milei’s ‘tough pill’

On Wednesday, the government of Argentina permitted the peso currency to drop by more than fifty percent, reaching 801 per dollar. This occurred as markets warily welcomed the first details of President Javier Milei’s plans to put Argentina’s struggling economy back on track.

To combat negative net foreign currency reserves, entrenched capital controls, inflation racing towards 200%, and years of economic stagnation, the government of the libertarian president stormed into office with pledges to implement radical economic changes.

The quick devaluation is one of several steps announced late on Tuesday by the new Minister of the Economy, Luis Caputo. These measures include reducing energy subsidies, reducing the size of the government, and stopping public works bids to bring the deficit down to zero.

“The news is positive,” said Bruno Gennari, an analyst in Argentina who works for KNG Securities. “It is a massive fiscal effort, with 3 percentage points of GDP of spending cuts and 2.2% of additional revenues.”

There was a rise of more than two cents for international sovereign dollar bonds, which now trade between 35.7 and 41.25 cents on the dollar. Many of these bonds are at their best level since 2021. Bond prices increased by an average of three percent.

In early trading, Argentine company shares listed in the United States were uneven. The state-owned oil company YPF had a 1.3% increase, while financial companies such as Grupo Supervielle and Grupo Financiero Galicia experienced a 2.7% and 1.7% decline, respectively.

“Non-deliverable” bets that the peso’s value would continue to fall were reflected in the intense movement of foreign exchange futures. The number of one-year forwards reached a high of 1,687.

The analyst, Salvador Vitelli, stated that the depreciation was “a little more than what the market expected. ” It was a significant departure from the withdrawal from convertibility in 2002. Before that time, the peso had been one-to-one with the dollar for a considerable time.

As a result of years of capital restrictions that severely restrict access to official exchange markets, the black market peso, a standard benchmark for the currency’s actual value, saw a decline of almost seven percent, making it equivalent to 1,150 dollars. On Tuesday, the difference between the actual and official rates was 191%; however, it has since shrunk to 44%.

Since 2019, Argentina has been artificially controlling the peso, which has resulted in a significant disparity between the official exchange rate and the black-market rate. The official exchange rate was 366 per dollar before Caputo’s declaration that it would go to 800, with additional plans for a monthly 2% devaluation.

PILL THAT IS DIFFICULT TO SWALLOW

In the past, the International Monetary Fund (IMF) had a more negative outlook on the current condition of its $44 billion program with Argentina. However, it expressed its approval of the “bold” adjustments that it believed might assist in stabilizing the economy and fostering growth.

Jimena Blanco, chief analyst at Verisk Maplecroft, said that the government was attempting to prevent a crash landing that would have otherwise been assured.

“He promised a very tough pill to swallow and he’s delivering that pill,” according to her. “The question is how long will popular patience last in terms of waiting for the economic situation to change?”

According to a report published by Barclays, the “governability” of the measures would be the most significant obstacle since they can potentially increase inflation significantly and precipitate a recession.

On Wednesday, the Central Bank of Mexico announced that it would maintain interest rates at 133% and place the peso on a course of creeping peg depreciation of 2% per month.

In addition, Caputo said that the government would reduce its spending by 2.9% of GDP, with approximately one percentage point of this reduction coming from reductions in subsidies for energy and transportation, and he also presented a list of new levies.

The current administration has not left a patient suffering from a toothache. Manuel Adorni, a spokesperson for the president, stated during a news conference on Wednesday that they had discovered a patient who was in critical condition and on the edge of passing away.

“We are going to do everything we can, not only to bring down the fever but to save him from the disease that is killing him.”