Eyes on the 2025 Midterm Prize
Will the exchange rate restrictions get lifted before Q4 2025, and what are the consequences of keeping them active?
Welcome Avatar! Last week, President Javier Milei hinted that the exchange rate restriction would be lifted after the midterm elections in Q4 2025. This adds almost 3 quarters to the original timeline. Let’s discuss potential ways this could play out in the upcoming months until the 2025 midterms.
The risks of maintaining this cepo have already been discussed in The Ghost of la Tablita:
The best way forward is deregulating faster. Both Macri and Martínez de Hoz made the same mistake of gradualismo, not deregulating fast enough and maintaining the bulk of restrictions even though the plan was to take them off.
But the longer the current restrictions are kept in place, the more likely it is that another 1981 or 2018 devaluation moment will have to happen (which will cause a spike in inflation again).
It seems this is now starting to look like a more likely scenario.
After his speech this week, Milei is adding almost a full year to the earlier estimates that suggested that the cepo would be gone by Q1 next year, which means the official dollar rate will remain at a rate determined by the government, with the crawling peg devaluation.
According to Milei, the restrictions will taken off when the monetary base, currently at $22.6 trillion pesos, is equal to the expanded monetary base, which includes Treasury deposits in the BCRA, currently in the area of $47.7 trillion.
"The risk of releasing it now is that another devaluation would accelerate inflation again for at least a few months, making it difficult to estimate the impact on public opinion."
— Javier Milei, full speech here
The risk of waiting, and maintaining the restriction for a long time, has to do with reserves: while there is a gap, the BCRA will not accumulate foreign currency, as it was able to do at the beginning of 2024. Mainly due to a very high exchange rate, the collapse of economic activity and, mainly, and the scheduling of imports.
All this will make it difficult to significantly reduce country risk and accumulate more reserves. On top of that, more maturities are due in 2025.
Negative reserves incoming?
It is difficult to know what level of reserves would trigger unstable scenarios, but estimates run at a negative of US$ 5.1 billion, subtracting Bopreal payments (the importer debt inherited from Sergio Massa) over 12 months.
Besides these payments, $4.6 billion USD is due in different maturities.
If the sum of the BCRA intervening in the exchange rate and the blanqueo (tax amnesty) inflows are neutral until January, this would means that if Argentina does not secure additional financing, net foreign reserve levels could be at minimums again for the beginning of 2025 — with the additional problem of more maturities coming due.
Tower of Maturities
What does the monthly payment profile of hard-dollar debt look like throughout the rest of Milei's term?
2024: $4.6 billion
2025: $18 billion
2026: $18.7 billion
2027: $20.3 billion
Until November 2027, the division of close to 60 billion from 2025 onwards is as follows, with sovereign bonds and the IMF making up the biggest chunks:
It is clear that without additional capital inflows, paying these maturities and not defaulting will be a challenge for the Milei government. This is also one of the reasons why this administration is so fierce about defending a month over month surplus.
Foreign Investment / Capital Formation
Maintaining that surplus will be easier with steady capital build up and foreign investment, but so far, foreign investment has been waiting it out.
Foreign direct investment in Argentina has plummeted since Cristina Fernández de Kirchner's second term, when capital and exchange rate controls under the cepo were imposed in the country for the first time in two decades:
This deterioration worsened even further during Alberto Fernández's government, due to the exchange rate restrictions and the lack of international reserves in the Central Bank (BCRA).
When looking at the gross capital formation as a percentage of GDP, the levels are still below levels of the same months in previous years:
It’s imperative to get these levels up in order to stimulate the economy, get out of the current recession and increase reserve levels to be able to face maturities.
Final Thoughts
The Milei government understands what the exchange restritions are and the danger that is inherent to keeping them in place: slower growth, a much more expensive Argentina (which means less foreign investment), and the danger of an explosive devaluation further down the road.
Why is the cepo still in place, you may ask? Because Milei is interested in achieving two things that, according to its vision, go hand in hand.
On the one hand, that the dollar is “cheap” in peso terms (meaning Argentina is more expensive) and on the other, that inflation goes down. The former would show that salaries have now recovered in dollars, while the latter would honor Milei’s campaign promise when he said he was the only one who knew how to lower inflation.
Achieving both lower inflation and salary increases, would add votes for the 2025 legislative elections, because it could show that salaries are recovered in dollars and it could show that inflation is falling. This is the best possible scenario if the restrictions are not lifted before the midterms.
The risk in this play is that the spread between the blue rate and the official rate starts widening, and the dollar rate starts to accelerate. This risk is also present if Milei decides to take off restrictions sooner, which Bank of America assumes the government will do in a “surprise move”.
If dollar demand is still high, inflation would accelerate first in wholesale prices, then in retail prices, and as a consequence the inflation win would be off the table. Is this a likely scenario? It could be.
As you can see, with this cepo situation Milei’s government is caught between a rock and a hard place, and it will be very interesting to see how the upcoming months unfold.
See you in the Jungle, anon!
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Thanks for the update. Generally, what do you think is the perception of Milei in Argentina right now ? If there would be elections today, would he be reelected ?
I don't like feeling of this. Choices between doing right thing and populism to get political benefits. Seems fragile. If he manages to navigate that maze successfully it would be great. But there is loooong string of government's failures waiting to add another bead to the record