Milei may resonate with Alfonsín’s sentiment by declaring, “Happy Easter, the dollar is in order.” However, it’s still early in the process. A more comprehensive withdrawal from currency and capital controls by Macri in late 2015 was executed with greater ease, yet it did not guarantee him a favorable outcome.
The exit from ‘cepo’ currency and capital controls took place on April 11. This move coincided with an agreement with the International Monetary Fund (IMF), leading to a remarkable increase in Central Bank reserves, which surged over 50 percent overnight last Tuesday, fueled by the influx of US$12.37 billion from the IMF. The recent developments in the currency market have prompted additional reasons for optimism, as the liberated dollar has shifted from the upper range of its float band, which is set between 1,000 and 1,400 pesos per dollar, to the lower range. Initially averaging 1,230 pesos in the first few days, the dollar’s value fell to 1,160 pesos by midweek, with many analysts predicting further declines ahead.
Should that scenario unfold, President Javier Milei would find his stance validated, as he has consistently asserted that the peso was never overvalued, contrary to the views of many economists. However, the significant Easter weekend migration for shopping in Chile, Argentina’s high position in the Big Mac index, and the stark contrast between tourist inflows and outflows may indicate a different reality. Milei may find himself echoing Raúl Alfonsín’s sentiments from 1987, following the resolution of the Holy Week mutiny with a proclamation of, “Happy Easter, the dollar is in order.” However, it is important to note that Mauricio Macri’s initial move to fully exit currency and capital controls during the first week of his presidency in late 2015 was notably smoother, yet it did not guarantee him a favorable outcome.
The monetary foundations of the new strategy appear to be more robust than the economic aspects, as one might anticipate given the middle initial of the IMF. During Milei’s 16 months in office, the decision to halve the money supply, coupled with the cessation of banknote printing and a focus on fiscal surplus, significantly alleviates pressure on the dollar. This move comes as the dollar’s supply has been bolstered not only by IMF assistance and other foreign loans but also by the export revenues generated from the Vaca Muerta shale, effectively reversing the prior energy deficit.
Currently, uncertainty reigns among Argentines, who are grappling with the dollar’s ability to fluctuate by 70 pesos in just one day. This situation, while unsettling, is arguably a better alternative to the rigid and unrealistic exchange rates of the past – a stark reminder of the harsh realities at play. The BOPREAL bonds, designed to address unpaid dividends and commercial debts stemming from previous insolvency—illustrating the incomplete exit from cepo—will draw in additional pesos. Meanwhile, the six-month holding period for dollar inflow serves as a prudent measure to guard against transient speculative capital.
Milei expresses unwavering confidence in the retreat of the dollar, suggesting that the currency could soon be available for just three digits. He is equally optimistic that inflation will slow down even more rapidly, despite some anticipated fluctuations in the current fiscal and monetary environment, especially following the end of the crawling peg devaluation. However, a declining dollar, while potentially validating Milei’s claims regarding an overvalued peso, also presents additional challenges. The current minimal peso return on the dollar is unlikely to motivate grain exporters during the harvest season. They may either opt to minimize their losses in light of a potential ongoing decline or be influenced by Milei’s warning that export duties will revert to previous levels in July. This serves as a crucial reminder that, despite the aggressive rhetoric surrounding fiscal policy, the preservation of a fiscal surplus this year heavily depends on maintaining a significant inherited tax burden, especially now that the cost-cutting benefits from last year’s high inflation have diminished.
A weaker dollar exerts broader implications beyond the agricultural sector. Milei has leveraged this situation to assert wage recovery, even amidst austerity measures, as salaries in dollar terms remain relatively high compared to regional counterparts, despite the rising costs within the country. The alteration of this equation raises an important question: will a weaker dollar translate into an unacknowledged wage boost during an election year, or will employees merely be reminded of their stagnant pay, regardless of the currency’s value. With a reduction in pesos required for dollarised inputs, there is potential for a decrease in the cost of goods, which could help mitigate inflation. However, the question arises: will more affordable imports jeopardize a local industry that has been built around substituting these goods, potentially pushing the economy towards recession? The future remains uncertain.
Despite the skepticism surrounding the cepo, there is no reason for lamentation. It remains very much alive, and more importantly, it has served as a significant barrier to economic growth, hindering the inflow of capital far more than it has allowed outflows.