Milei’s market honeymoon ends as investors question economic plan

Argentina’s libertarian president Javier Milei is facing the first major test of his plan to fix the country’s troubled economy, after his moves to control a run on the peso sparked a market backlash.

The government sets the peso’s official exchange rate at about 960 to the dollar, but on parallel exchange markets — both legal and illegal — the Argentine currency hit a record low of almost 1,500 per greenback this month.

The gap between the rates is seen as a key indicator of confidence in the government, and can fuel inflation.

Last Saturday Milei unveiled a plan to stabilise the peso: the central bank will tighten rules on money printing to shrink Argentina’s money supply, and start using its scarce foreign currency reserves to buy pesos on the parallel market.

“If I turn off all the money printing taps, the problem ends,” Milei told broadcaster LN+. “There’s no panic, zero panic.”

Investors do not seem to agree. Argentina’s stock market fell as much as 12.3 per cent last week, and its dollar-denominated sovereign bonds as much as 11.3 per cent before paring some losses, as critics dubbed the new measures short-termist and inconsistent.

Delays in building up foreign currency reserves will slow the government’s plan to lift currency controls — a prerequisite for foreign investment and significant economic growth — and increase the likelihood that the government will have to default on more than $9bn in repayments on its foreign currency debt next year.

“They are [sacrificing the goal of building up reserves] to repress exchange rate volatility — and the latter is something no investor is concerned about because it’s a symptom of problems, not a problem itself,” said Juan Pazos, chief economist at Buenos Aires-based financial services firm TPGC Valores.

“Asset prices [are recovering] somewhat, but these kinds of decisions start to erode your confidence that the policymaker has the right priorities.”

Milei has delivered on his flagship election pledge to “take a chainsaw” to Argentina’s public deficit in order to bring down sky-high inflation: the monthly inflation rate plunged from 26 per cent in December to 4.6 per cent in June.

He argues that keeping the peso strong is key to keeping inflation down.

But investors are concerned that controlling inflation at all costs is now distracting from the other ingredients for Argentina’s long-term recovery: the removal of currency controls, accumulation of reserves and access to international capital markets.

“The government surprised the market with those early inflation and fiscal successes, but now there’s a sense that they’re running behind events — putting out fires rather than setting the agenda,” said Amilcar Collante, economics professor at the National University of La Plata.

The economically unorthodox moves to support the peso will also strain negotiations that Milei recently began with the IMF over a potential new loan for Argentina, which already owes the fund $43bn, analysts said.

Milei has dismissed concerns about his economic plan, laying the blame for exchange rate volatility on Argentine banks.

Last week he accused one of the banks of deliberately trying to “destabilise” the government by exercising put options — agreements that oblige the central bank to buy back its debt — and forcing the monetary authority to print pesos.

Economy minister Luis Caputo said on Thursday on X that the government’s goal “has always been to reduce the amount of pesos in circulation . . . Some are still unconvinced [but] reality will show that soon . . . the peso will be a strong currency!”

Argentines have already faced three years of annual inflation above 50 per cent, and Milei has made bringing price pressures down his top priority. To do so, he has halted previous governments’ use of money printing to fund spending, pursuing an extreme austerity programme.

Meanwhile, Caputo, a former Wall Street trader, has advanced a complex plan to clear billions of dollars’ worth of central bank debt held by local banks, and curb the use of money printing to fund interest payments. 

At the same time, Caputo has tightly controlled the peso’s official exchange rate, a key driver of inflation. After a sharp initial devaluation of 52 per cent in December, Caputo has devalued the peso by just 2 per cent a month.

Economic activity rebounded slightly in May thanks to agricultural and mining exports, with a 1.3 per cent increase from April, according to official data. But massive contractions continue in domestic sectors such as construction and retail.

Milei’s bet is that controlling inflation is the key to maintaining public support for his austerity drive. So far it is paying off, with his popularity hovering firmly around 51 per cent, said Shila Vilker, director of pollster trespuntozero.

But business leaders increasingly complain that Caputo’s slow devaluation policy is hurting exports’ competitiveness.  

“They ought to correct the exchange rate and warn that inflation will go up temporarily . . . to improve the balance for the external sector,” billionaire property developer Eduardo Constantini told local television on Wednesday. 

Sebastián Menescaldi, director of consultancy EcoGo, said businesses were concerned that measures framed as an “emergency plan” back in December had yet to give way to a long-term road map for lifting currency controls and restoring growth. 

“When you take the emergency measures past three to six months, they start to become inconsistent,” he added. “Now the only way they can resolve those inconsistencies is by finding a lot of dollars for the central bank in the next two months, or they will have to devalue the peso.”

Sources of dollars exist, but tapping them is difficult. Crucial agricultural exporters, Argentina’s main source of foreign exchange, have so far been discouraged from selling their stock by low international commodity prices, compounded by the uncompetitive exchange rate.

Some $21bn worth of exportable grain is sitting in storage, according to calculations by Argentina’s Rural Society agribusiness lobby.

An investment incentive scheme approved by congress last month could pull in dollars via the energy and mining sectors, while the government claims an imminent tax amnesty will bring in some $1.5bn.

Analysts say the government is pinning much of its hopes on the idea that the IMF will agree to lend Argentina more cash to help it exit currency controls, particularly if Donald Trump — whom Milei claims as an ideological ally — wins November’s election in the US, the fund’s main stakeholder.

But the government’s decision to use its reserves to prop up the peso will make a deal harder to reach, given that the IMF has criticised such practices. Argentina is already the IMF’s largest debtor and the recipient of the most IMF bailouts in history.

“The government has got tangled up, and started doing things that move it away from its ultimate goals,” said Gabriel Caamaño, an economist at financial consultancy Ledesma.

He said the government had several options to regain momentum in its economic programme, such as loosening some minor parts of the capital controls regime to boost markets, or making steps to satisfy the IMF.

“It’s not too late to correct this with a few good moves,” he said. “This isn’t a tragedy yet.”