Argentina’s government announced a battery of measures over the weekend to try to rein in the parallel exchange rate and contain inflation, including the sale of foreign reserves. The move triggered a sell-off in government bonds and stocks.
“No more pesos will be printed in Argentina by any means,” Economy Minister Luis Caputo said Saturday on Radio Mitre. “We are turning off another tap.”
This means that when the central bank buys dollars for foreign trade deals, it won’t print pesos as it traditionally does, he added.
“If the central bank purchases dollars in the official exchange market, the equivalent issuance of pesos will be sterilized by the sale of equivalent dollars in the contado con liquidación market,” Caputo said on X, in reference to a separate market where dollars can be traded more freely but at a higher cost.
The measures are widely expected to reduce the gap between the parallel and official rate, but risk that international reserves will dwindle has sparked concern.
“If the objective of reserves accumulation loses priority and the central bank is also going to sell in the gap, the bond market will not take it well,” financial analyst Amical Collante wrote on X.
Investors didn’t react well to the measures. While the peso gained against the dollar on the parallel rate, the country’s global, dollar-denominated bonds fell by as much as nearly 10% and the S&P Merval index of most-traded stocks slipped 4.9%, led by a 13% plunge in shares of agribusiness Cresud and a 12.8% slide in Telecom.
In another move to restrict the supply of pesos, banks will be required to resell their put options — pledges by the monetary authority to buy back notes if they fall below a determined price — to the central bank.
FIGHTING INFLATION
In the radio interview, Caputo said the monetary measures are designed to help contain inflation, another big challenge for right-wing government. While the Milei administration has made progress in bringing the monthly inflation rate down to 4.2% in May from 25.5% in December when he took office, consumer price growth accelerated in June to 4.6%, or 272% on an annual basis.
Quickening inflation has led to a widening of the gap between the official and parallel exchange rate. The parallel rate hit a record ARS1,500 per dollar on Friday compared with the official rate of ARS960 per dollar — a gap of 44%, the widest under Milei.
The gap narrowed to 38% on Monday after the new economic measures were announced, with the parallel rate strengthening to ARS1,415 per dollar and the official rate weakening to ARS965.
The rollout of the new monetary measures comes after Milei said July 5 that he would halt monetary expansion, which he has declared, along with a fiscal deficit, as the main reason behind Argentina’s longstanding economic woes. This is the second stage of a three-pronged reform following the approval last money of sweeping deregulation and fiscal reforms to pull the country out of a financial crisis that began in 2018 and worsened last year.
This second stage will also include a series of reforms to boost economic growth, create jobs and increase salaries and pensions, as well as reduce interest rates, improve access to credit and attract more investments. A third stage will see the economy grow robustly, Milei has said.
Caputo said the strategy is bearing fruit, with the fiscal deficit swinging to a surplus in the government’s first six months in power.
With “zero” monetary issuance, “we could quickly go to the inflation of a normal country.”