Milei bets on state intervention to contain the dollar against peso

“Buy, don’t miss it, champion.” Pronounced two months ago, the phrase of the Argentine Economy Minister, Luis Caputo, intended to be a mocking challenge to whom they warned that the dollar was artificially cheap in pesos. But it ended up being the last candidate to integrate a long and infamous series of unfortunate expressions about the American currency in the recent history of Argentina: that list that keeps a prominent place for “the one that bets on the dollar loses” (of the minister of the dictators Corralito), among many others.

The ironic invitation to acquire currencies of Caputo had the acceptance that, in truth, the government of Javier Milei hoped to discourage. Given the growing demand, the price of the dollar against the peso began to climb and put in check the plans of the ultra -right. The Executive tried to contain her erratically until, finally, this week she fieled the flag of the free flotation, previously proclaimed as an unwavering mantra, and bleached her decision to intervene in the change market, something that she had already been doing out of the picture.

Milei’s background objective is to pass the legislative elections (this Sunday in Buenos Aires, October 26 at the national level) with controlled inflation, thanks to the exchange anchor. As the market already discounts another turn of the course after elections, instability and distrust deepens. Meanwhile, the weight continues to fall and the treasure, giving resources.

When in April the president got a new rescue of the International Monetary Fund (IMF), this time for 20,000 million dollars, he lifted exchange restrictions for individuals, although he kept it for companies. Instead of the so -called “CEPO”, in force since 2019, established a currency flotation regime between bands: a 1,000 pesos per dollar floor, a roof of 1,400, with a divergence that extends each month.

The declared purpose of the Ultra Government was that the dollar remained on the floor of the bands. He got it initially. Until June, even below 1,200 pesos. But the recurring lack of currencies in the second semesters, after the liquidation of the main agricultural exports, began to be felt in combination with the growing demand of a cheap dollar for Argentines. It also affected the Executive’s decision to cancel the fiscal letters (LEFI), a financial instrument of the Treasury that absorbed pesos: that measure implied the disarmament of a Stock of 15.5 billion pesos held by public and private banks, which largely turned to the market.

Thus, between mid -April, when capital controls were eliminated, and July, the formation of external assets reached 14.5 billion dollars, an amount similar to that disbursed by the IMF. In July alone, last month with official data, the private demand of dollars reached 5,432 million, 30% more than the previous monthly average. The price of the green ticket in front of the weight accused the impact: this Friday, the United States currency closed to 1,380 pesos.

The Milei government blamed banks to perform speculative maneuvers and also denounced that financial anxiety was due to “Kuka risk”, a derogatory allusion to the possible electoral triumph of Kirchnerism. While the president himself and his officials repeated, tireless, that the dollar floated in freedom, the Executive rehearsed in recent weeks various measures to contain it with a brutal monetary apparent. He called Emergency to Tender Treasury Lyrics and validated annualized rates of up to 75% (almost triple Dand the expected annual inflation) to reduce circulating weights and avoid its passage to the dollar.

With the same purpose, in successive resolutions it was raised to record levels, above 50%, bank lace (the amount that banks must maintain as a protection of their customers’ deposits). At the same time, it operated intensely in the sale of future dollar contracts, in search of calming upward expectations.

None of that resulted and the peso continued to fall against the dollar. Given the proximity of the elections, and complicated by a corruption scandal that splashes the Casa Rosada, “the most liberal government in the world”, as Milei has defined its management, announced last Tuesday its decision to intervene in the change market. The agreement with the IMF assumed that it could do it only to sustain the bands, today in approximately 950 and 1,470 pesos, but the executive began selling to keep the currency below 1,400. Although there is no official information, it is estimated that in four days the treasure sold about 500 million dollars.

From even antagonistic approaches, numerous economists outside the government are questioning the uncertainty generated by the comings and laps of official measures. They also point out that the rise in rates and bank lace threatens economic activity.

Former Minister Domingo Cavallo, the creator of the convertibility system that governed Argentina in the 1990s and supported Milei at the beginning of his presidency, criticized the Executive for his “unpredictions and improvisations.” “The fundamental problem,” he said, “is that it is not defined what is the country’s monetary, financial and exchange system” and that the authorities continue to “use casuistic and discretionary controls and interventions.”

For the Ecogo consultancy, directed by Marina Dal Poggetto and Sebastián Menescaldi, the Government failed in its evaluation of the “Dollar Balance/Interest Rate required to continue using the dollar as an anchor without stocks, without reservations, without access to the credit to refinance the maturities of dollars and with a large concentration of maturities of weights in the treasure”. Many experts point out as an executive error not to have acquired currencies for 2024 to strengthen the lean reservations of the Argentine Central Bank.

“The Government prioritized to reach the elections with controlled inflation (and low, compared to recent years). This implied, within the framework of a exchange scheme with less and less certainties, reinforce the salary anchor and, more recently, the monetary,” summarized a CP consulting CP report, by Federico Pastrana and Pablo Moldovan. “The economy approaches October threatening with a recession, with low and falling income, and with credit reducing its dynamism.”

With the economic policy subject to the Government to the elections, market analysts presume that the day after the votes there will be an adjustment of objectives, strategies and perhaps officials, with a new devaluation of the weight included. The main unknown is whether the changes may wait for the seven weeks missing for national elections. In part, it will depend on the result that the polls in the local elections of the province of Buenos Aires, where Milei intends to bend to ruling Peronism.