Pesos Through the Nose
Foreign direct investment, exchange rates and economic activity, and outlook until the October midterms
Welcome Avatar! Now that Argentina has lifted the currency restrictions for individuals and the peso has actually appreciated, one has to wonder if having the most expensive Big Mac after Switzerland is a sustainable path for the country in the medium to long run.
During the spring sessions of the International Monetary Fund and the World Bank, BCRA President Santiago Bausili explained the challenges faced at the outset of the economic adjustment program being implemented in Argentina:
“We recognize the fact that Argentina has a dual-currency economy, where people have already decided to save in dollars, use the dollar as a unit of account for long-term assets, for real estate, for cars, for wealth, for education, but use local currency for transactional purposes.
So we decided not to fight that. That's a reality.
That's what society is doing, whether we like it or not. Therefore, we prefer to adapt policies and the economic framework to what's already established, rather than trying to change mindsets or believing we can do it.”
With not fighting it any longer, Bausili is referring to lifting the currency restrictions and let individuals buy dollars freely. However, the cepo is not yet fully lifted for companies in terms of paying out dividends abroad for years prior to 2025.
The current phase must define which restrictions will be eliminated to prevent multiple exchange rate practices and layering to reduce gaps. Argentina is now moving from a fixed crawling peg to a banded floating system, the mechanics of which we discussed in Ciao Cepo.
The expectation was that the peso would quickly devalue under this new system, since it feels overvalued and in many sectors Argentina is losing competitiveness in terms of pricing — paying $4 USD for a cappuccino is expensive even when compared to the most expensive years in the 1990s with a 1:1 dollar/peso peg.
Why did the peso appreciate and will this come to haunt the Milei administration in the months running up to the midterms in October? Let’s find out.