Following a two-year focus on maintaining “a cheap dollar” as a means to demonstrate declining inflation rates, President Javier Milei’s administration has capitulated to demands from Washington to bolster Argentina’s international reserves. The announcement of an update to the peso’s exchange-rate trading bands, indexing them to inflation starting in January, reflects a pragmatic shift: Milei’s economic team is prioritizing the enhancement of Argentina’s credit profile over the immediate reduction of inflation. This strategy aims to lower the country risk premium, which, despite the recent testing of the Bonar 2029 bond, has remained stubbornly above the 600 basis-point threshold. The market’s more nuanced interpretation is that the “remonetisation” scheme introduced by the Central Bank aims to provide the monetary authority with the flexibility to purchase foreign currency, while permitting the exchange rate to appreciate without direct intervention. The expense associated with that “flexibility,” however, results in an elevated baseline for prices.
A former head of the Central Bank, speaking off-the-record to Perfil, articulated one of the significant challenges presented by the new framework: “An acceleration in devaluation will set a floor for inflationary inertia unless the recession deepens.” The rationale is that by tying the upper limit of the band to historical CPI data, expectations are likely to become self-reinforcing. To prevent the “remonetised” pesos from being converted into dollars, the source contended, “they need high interest rates in pesos, or on local dollar instruments, to avert capital flight.” During a press conference, BCRA Governor Santiago Bausili emphasized that “the new exchange-rate regime is consistent with the downward path of inflation” and characterized the measure as “a contribution to reducing uncertainty.” Certain market commentators contend that a contrary effect will manifest. Just a month ago, Economy Minister Luis Caputo stated to the Fundación FIEL that the bands were “well calibrated,” advocating for the rigidity of the exchange-rate ceiling.
In response to inquiries from the media regarding the recent shift, Bausili asserted that despite the modifications, this continues to be “the best regime.” He emphasized that inflation indexation does not necessarily indicate a “higher or lower” peso-dollar exchange rate, but instead suggests “a greater degree of flexibility.” In financial terms, that flexibility is interpreted as a correction necessitated by the limited availability of foreign currency. Aside from inflation, the primary inquiry revolves around the financial sustainability of the Milei administration’s strategy for reserve accumulation. Economist Pablo Moldovan has quantified the challenge confronting the government in the upcoming year; his analysis indicates that the BCRA is establishing two prerequisites for the acquisition of reserves: a rise in demand for pesos and an adequate supply of dollars. “The initial condition appears to be more straightforward. Should the economy expand, the demand for pesos will increase. Moldovan cautioned, “The second condition looks much more difficult.”
The external sector projections for 2026 appear to be maximized. To avert the scenario where public debt consumes the reserves that the Central Bank aims to build, Argentina’s Treasury must engage in the refinancing of approximately US$14 billion in maturities within the voluntary market. “A very ambitious target for the first year back on the markets,” Moldovan concluded. The private sector must also contribute its share. In order to stabilize the foreign exchange market and address a current account deficit, it is necessary for companies to augment their net external debt by an additional US$14 billion. This suggests that average monthly private capital inflows would amount to US$1.7 billion, a threshold that historical data indicates has been achieved in only six months over the past 23 years. The proposal put forth by Bausili reveals a paradox: should the economy recover and consumption increase, the demand for imports – and consequently for dollars – is likely to rise, exerting pressure on the upper threshold of the band. Furthermore, outbound tourism is likely to persist in applying pressure if the real exchange rate appreciates or is viewed as inexpensive. The prevailing consensus among trading desks is that, in the absence of substantial external financing, the strategy is viable solely in a recessionary context that diminishes import demand and consumption, thereby alleviating pressure on the dollar. “They need to acquire US$14 billion to fulfill Treasury maturities and US$10 billion to remonetize the economy. It’s a lot,” summarized the former Central Bank consultant interviewed by this outlet.