BUENOS AIRES: Investors are pulling money out of Argentina at a rapidly increasing clip, forcing policymakers to pour US$1bil into the currency market in just two days to prevent a peso devaluation that would derail president Javier Milei’s stabilisation plan and throw the economy back into crisis once again.
Milei’s deep spending cuts and sweeping reforms had been welcomed by global investors soon after the libertarian economist took office in late 2023, setting off rallies across its financial markets.
Inflation soon began to ease, falling below 100% and shoring up support for Milei for a while.
But as he’s started to suffer political setbacks that hurt his ability to keep pushing through his agenda, the country’s bonds, stocks and currency have all come tumbling back down.
The rout has left the government scrambling to keep the peso within a trading band it set as part of a US$20bil loan it got from the International Monetary Fund (IMF) this year.
The peso touched the upper end of the band – right around 1,475 per US dollar – and even briefly pierced it last week, sparking jitters among Argentines who’ve been burned by currency crashes again and again that another one was brewing.
With the currency sliding almost every single session in the past two weeks, authorities had to step in. They ushered in tighter trading controls, and sought to assure investors that they won’t allow the peso to plunge, which could fuel another inflationary spiral.
They’ve also had to intervene in markets, spending US$1.1bil in just three days to prop up the peso. The amounts have increased dramatically each day – US$53mil last Wednesday, US$379mil last Thursday and US$678mil last Friday – signalling just how fast the mood is souring.
“We trust in the programme and we’re not going to move away from the programme,” Economy Minister Luis Caputo said late last Thursday on a podcast. “We’re going to sell up till the last dollar in the ceiling of the band.”
The government’s moves have so far done little to reassure investors, who have been losing faith in Milei’s ability to remake South America’s second-largest economy since he was handed a resounding loss in local elections that were seen as a harbinger of next month’s congressional races.
Voters already struggling to adapt to a slowing economy and a higher cost of living were angered by cuts to essential investments in healthcare and education and a brewing corruption scandal involving Milei’s inner circle.
With his popularity tumbling, the victory by the left-wing Peronist opposition in the country’s main province, Buenos Aires, was seen as a sign that he’ll be unable to push through the rest of his agenda. Successive losses in Congress have only added to the concerns.
“It’s probably too soon to say that the story is crumbling, but certainly the new pieces of information that we’ve gotten in the last week have all been negative,” Christine Reed, emerging market local currency debt portfolio manager at investment manager Ninety One in New York, said in an interview. “The outlook going into midterms has worsened dramatically.”
Investors have run to the exits.
The S&P Merval equity index is the worst among more than 90 global benchmarks tracked by Bloomberg this month.
Argentina’s US dollar bonds are leading emerging market losses in the span, with notes due 2035 at a one-year low after the worst two weeks on record.
Yields, which were at 10.27% at the start of September, have shot past 17%, sending the country’s debt back into territory considered distressed.
The currency has lost ground on almost every single session since the Buenos Aires vote, including a 7% drop in the immediate aftermath.
At last Thursday’s pace, “the government would need US$9.75bil to defend the band until the elections,” Santiago Resico, economist one618 Group, a Buenos Aires brokerage, said. “It seems too high a cost for the government, and may lead it to make changes to the exchange-rate scheme.”
Milei’s central bank had lifted some currency controls and agreed to let the peso float freely in an established band that gradually expands 1% a month in both directions, broken evenly into daily increments, as part of the lending agreement with the IMF.
Once the peso hits the floor or ceiling of the band – as it did last week – monetary officials are allowed to directly intervene.
But even before the sell-off intensified, the administration was already taking other steps to keep a hold on the currency.
In the past few months, Argentina’s Treasury began selling US dollars and the central bank went into futures markets to stabilise the peso as it came under increasing pressure.
The government also jacked up reserve requirements to drain pesos from the economy and restricted dollar demand from brokers.
Late last Thursday, the central bank banned shareholders and managers of banks from trading in financial dollars, known locally as MEP and CCL, for up to 90 days after purchasing currency on the official exchange market.
The sudden re-tightening of foreign exchange market rules mark a stark turnaround for Milei, a free-marketeer who won on promises to dollarise the economy and close the central bank altogether.
Those pledges won over investors who saw the need for radical change to end a cycle of crises that had driven the government into debt defaults and fuelled spells of high inflation.
The country’s debt delivered some of the best returns in emerging markets last year, up more 100%, according to data compiled by Bloomberg.
Some money managers, like Ninety One’s Reed, are not throwing in the towel just yet.
She’s kept local bond exposure to the country, but hedged the foreign exchange side to account for dramatic changes in the scenario – the government is unlikely to gain a majority in Congress next month, she says, and will likely have to devalue the currency after the vote.
“Even if you are running an unsustainable foreign-exchange policy for the next few weeks, if it does increase your odds of winning, I think you ought to be doing it,” she said. “The thing the market is looking for right now is just some evidence that the administration understands that they’re in a bad position and some evidence that they’re changing their strategy.”
“Country risk has surged past 1,500 basis points, the central bank has spent more than US$400mil to defend the peso and there’s questions as to how the government will cover sizeable foreign exchange-denominated debt service obligations for 2026 to 2027. With a return to international market access now looking distant, Milei’s economic team faces a narrowing set of options,” Bloomberg Economics said.
In the past few days, Milei’s rivals in the lower house of Congress ratcheted up their pushback against his austerity agenda.
They rejected two controversial vetoes on education and healthcare spending. The Senate is seen as even more hostile to the administration, meaning the higher spending will likely pass.
The votes led to further slides in the country’s assets as they spell trouble for the second half of Milei’s term.
“The market is already pricing in a discontinuity on Oct 27, under the assumption that the band regime will expire with the election,” Resico wrote in a research note.
“This built-in expiration date erodes credibility each day, making the regime harder to defend regardless of fundamentals.” — Bloomberg
