Argentina peso slides after currency and capital controls lightened

Buenos Aires — Argentina’s peso slid 12% on Monday to about 1,200 per dollar after the country undid large parts of its currency and capital controls at the end of last week, part of sealing a $20bn loan programme with the IMF.

Despite the volatility, the move to unravel controls in place since 2019 has been cheered by investors and economists, who say it marks a key step towards normalising the Argentine economy after years of crises.

The move, which could risk stoking inflation and see Argentines rush to snap up dollars, is a key plank of libertarian President Javier Milei’s bold and risky reforms in the grains-to-shale rich country that has been battling triple-digit inflation, dwindling currency reserves and tepid growth.

Milei wants to bring international investors back to the country’s mining and energy sectors, spurring development of shale oil and gas reserves in Vaca Muerta and deposits of lithium, which is used in electric vehicle batteries. The currency controls jammed up investment.

The peso drop came after the central bank undid its so-called crawling peg and allowed the currency to float freely within a far wider trading band of 1,000-1,400 pesos per dollar, a major policy shift investors and firms had been pushing for.

The currency had closed at 1,074 per dollar on Friday, though popular parallel rates often used by Argentines and local firms were nearer 1,350 per dollar.

The gap between the two rates narrowed sharply on Monday to about 7%, versus 28% at the end of last week, with the official exchange rate weakening and parallel rates gaining.

The country’s international bonds on Monday rallied with some maturities adding more than 4c on the dollar, according to data from MarketAxess. Some local bonds slipped, while the local Merval stock exchange jumped 8.5%.

The IMF support is seen boosting overall confidence and the removal of controls could help spur investment.

“We have a positive view of the announced macro framework, which should allow for FX [foreign exchange] reserve accumulation and more sustained growth,” said Morgan Stanley economist Fernando Sedano in a note on Monday.

He added that inflation could heat up in the short term, and interest rates may have to rise while the investment bank was keenly watching a visit to Argentina on Monday by US treasury secretary Scott Bessent.

“Will that visit bring tariff relief or some extra FX funding? We view both as likely,” Sedano wrote.

Argentina has been pushing the US for a deal to avoid tariffs as part of US President Donald Trump’s global trade war. Milei and Trump are ideological allies, with Bessent’s visit to Buenos Aires seen as a key show of support.

The IMF deal will release an initial $12bn, with $3bn more coming later this year.

Argentina also announced large loan deals with other multinational lenders and banks that should help bolster its depleted foreign currency reserves.

The South American grains producer is digging itself out of a major economic crisis under Milei, who came to office in late 2023 and has managed to stabilise the economy with austerity and fiscal discipline.

Capital Economics said Buenos Aires had moved “more quickly than we’d anticipated to restore macro orthodoxy”, though cautioned that the peso still looked overvalued.

“The country appears closer to a semblance of macroeconomic stability than at any point since the 2000s,” it wrote.

The IMF deal came with targets and baseline assumptions that would see the country continue to commit to a “zero deficit” and to build up reserves this year. New investment in areas such as energy and grain exports will be important for that.

JP Morgan said the fall in the peso could be tempered by demand from grain exporters for pesos as they looked to liquidate their foreign currency income at a more attractive exchange rate.

“In our view, the official FX is likely to stabilise below the parallel FX level as of Friday, with agriculture-related FX supply catching up. The FX gap is likely to shrink to about 5%,” the investment bank said.

Reuters