Argentina’s Slippery Peso Policy
Dollarization is out. The monetary regime is discretionary and non-transparent.
By Mary Anastasia O’Grady
Argentina narrowly avoided recession at the end of the third quarter, according to data released last week by the National Institute of Statistics and Census.
Instead of the September economic contraction that many economists had been expecting, output grew 0.5% month-over-month, the institute said.
There were also upward revisions for July and August.
Third-quarter growth finished at a seasonally adjusted 0.5%.
The economy shrank in the second quarter.
A negative September print could have produced back-to-back quarterly contractions, the definition of recession.
By dodging the R-word, President Javier Milei denied his adversaries a headline they dream about.
Some pro-market observers, who want to see this president succeed, sniffed at the report.
They said the revisions were unusually large and cast doubt on the work of the institute, known to have been politicized during a previous government.
There’s no evidence of monkey business.
But the skepticism is notable for what it says about the difficulty in building trust in public institutions after so many decades of malfeasance and mismanagement.
Argentina’s long history as a serial defaulter and its repeated bouts of spectacular inflation aren’t erased from memory because Mr. Milei calls himself a libertarian.
Mr. Milei’s challenge is to boost investor faith in his country as a destination for capital.
But he’s ruled out dollarization and instead runs an opaque and discretionary monetary regime.
Add to this the heavy schedule of debt payments Argentina faces next year.
The country’s risk premium as measured by J.P. Morgan’s Emerging Market Bond Index has come down.
But at 650—Lula’s Brazil is at 202—it’s still prohibitively high.
The Milei government has made important progress in two years.
It has balanced the budget, improved government aid to the poor by removing political middlemen, and cut a tangle of red tape that was strangling business.
Protectionists are up in arms because Mr. Milei has been opening the economy.
Inflation will end this year at about 30%, down from over 200% when he took office.
Yet a 5% year-over-year growth rate for the end of September is misleading.
Much of it is explained by a sharp rebound late last year from a deep contraction.
Pockets of the economy, like mining and oil and gas, are booming thanks to a special carve-out that favors large investments with tax benefits and foreign-exchange protections.
But in the rest of the economy, new capital and the job creation that would accompany it haven’t materialized.
Economic stagnation almost cost Mr. Milei’s Liberty Advances coalition in the October midterm legislative races.
That was until President Trump promised that the U.S. Treasury would backstop the peso if voters gave the coalition the support the Argentinian president needs to govern over the next two years.
Dreading the alternative—an opposition super-majority and a run on the currency—Argentines delivered.
Crisis averted—for now.
The government says it will focus on tax, labor and penal code reforms in the coming extraordinary session of Congress.
It will also try to pass new fiscal rules for budgeting.
There’s reason for optimism.
But investors seem to be waiting.
In the Milei economy, free prices are rightly celebrated for the information they provide.
Yet the most important price of all, the price of the peso, is controlled by the government.
With an undisclosed amount of borrowing from the U.S., Argentina targets an “official” foreign-exchange-rate range and the treasury or the central bank buys and sells pesos but without clear rules or transparency.
To make matters worse the range in which the peso is allowed to trade widens by 1% per month while inflation is running at 2% per month.
If this continues, it will be difficult to avoid further overvaluation followed by an inevitable devaluation. Some capital controls remain in place.
Does that mean the government still believes in arbitrary rules that block money from leaving the country?
Argentina owes about $55 billion to the International Monetary Fund.
In October the U.S. Treasury bought the peso to prop it up and later opened a $20 billion swap line with Buenos Aires.
The terms of those arrangements are state secrets. Treasury Secretary Scott Bessent also floated the idea of another $20 billion of lending to Argentina from banks.
They didn’t bite. Press reports indicate that U.S. banks might provide some $5 billion through a repurchase agreement to help Argentina meet interest and principal payments due in January.
Creditors will want to be compensated for the risk.
The government anticipates an increase in the demand for pesos.
Therefore, it says, the central bank can print more of them and buy the dollars it needs to bulk up reserves without generating inflation.
It needs those dollars if it hopes to defend the currency when there are more sellers than buyers.
To wit: Confidence in Argentina will create a currency that inspires confidence in Argentina.
That would be a first.
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