{"id":16052,"date":"2025-02-06T06:05:17","date_gmt":"2025-02-06T06:05:17","guid":{"rendered":"https:\/\/financialrush.com\/?p=16052"},"modified":"2025-02-06T06:05:17","modified_gmt":"2025-02-06T06:05:17","slug":"javier-mileis-quest-to-defuse-argentinas-currency-control-bomb","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=16052","title":{"rendered":"Javier Milei\u2019s quest to defuse Argentina\u2019s currency control bomb"},"content":{"rendered":"

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Argentina\u2019s libertarian President Javier Milei is promising to lift the country\u2019s strict capital and currency controls this year, starting the clock on a high-risk mission that is essential to his revival of the troubled economy.<\/p>\n

The controls, which limit individuals\u2019 and companies\u2019 access to dollars and set an official exchange rate, have been in place for nine of the past 13 years. Foreign businesses say they are a huge hurdle to investment in Argentina, even as Milei\u2019s free market reform drive piques their interest.<\/p>\n

Milei<\/a> is seeking an IMF loan to help him lift the controls, but says he will do so by the end of this year regardless.<\/p>\n

\u201cEven without the IMF\u2019s help\u2009.\u2009.\u2009. the controls will no longer exist on 1 January 2026,\u201d he told a local television on Monday. \u201cNow, [if there is a disbursement], we can do it faster. We\u2019ll have to see how the program is structured.\u201d<\/p>\n

Milei has a good reason to hesitate, economists say. Known collectively as \u201cel cepo<\/em>\u201d (\u201cthe trap\u201d), the controls are made up of half a dozen critical regulations and many smaller rules, which help stabilise the peso and prevent capital flight from Argentina.<\/p>\n

Removing the wrong rule at the wrong time could unleash too much pent-up dollar demand, leaving Argentina<\/a>\u2019s cash-strapped central bank unable to respond, and force the government to devalue the peso\u2019s official exchange rate. Or it could provoke volatility on the black and legal financial markets where Argentines buy dollars, because access to the official market is restricted.<\/p>\n

Either of these scenarios could reignite the inflation crisis that Milei has managed to tame with a severe austerity package. The monthly inflation rate has fallen from a peak of 26 per cent in December 2023 to below 3 per cent \u2014 the main factor sustaining Milei\u2019s consistent 50 per cent approval rating, pollsters say.<\/p>\n

\u201cMilei doesn\u2019t want to risk cutting the wrong wire in this [bomb] that he is disarming, and blowing up his whole success story,\u201d said Fabio Rodriguez, a director at M & R Asociados, a financial consultancy in Buenos Aires.\u00a0<\/p>\n

\u201cThe problem is, we\u2019ve had the controls for so long that we don\u2019t know how many people will sell pesos when they are lifted, or where exactly the exchange rate should be,\u201d he added.<\/p>\n

Argentina is due to hold midterm elections in October, where Milei\u2019s La Libertad Avanza hopes to grow its tiny congressional minority. Analysts say Milei is unlikely to risk changes to the controls in the run-up to the polls, and authorities say they aim to reach an agreement with the IMF by April.<\/p>\n

Milei has said he needs $11bn to replenish central bank\u2019s negligible hard currency reserves and bolster its firepower to prevent a potential run on the peso as controls ease.<\/p>\n

Argentina is already the fund\u2019s largest debtor, still owing more than $40bn for its most recent programme, which concluded in December. <\/p>\n

An IMF delegation left Argentina last week after negotiations in which the main sticking point was Milei\u2019s unorthodox exchange rate policy.<\/p>\n

The peso was allowed to weaken just 2 per cent a month in 2024, with the pace reduced to 1 per cent from this month. With inflation running well above that, the currency appreciated<\/a> more than 40 per cent in real terms last year. Argentina has run a current account deficit since June and the central bank has struggled to build up reserves. <\/p>\n

But IMF officials, including managing director Kristalina Georgieva, have praised the rest of Milei\u2019s policies, which in 2024 delivered Argentina\u2019s first budget surplus in 14 years. <\/p>\n

That has fuelled growing expectations of a deal, particularly as the fund was willing to lend to Milei\u2019s left-leaning predecessor, who printed billions of dollars\u2019 worth of pesos to fund spending and failed to relax currency controls.<\/p>\n

Analysts and people familiar with talks said the deal could hinge on a phased lifting of controls, designed to carefully manage new dollar demand.<\/p>\n

\u201cI would be very surprised if they decided to lend without a commitment on lifting controls, but they shouldn\u2019t empty the whole spaghetti bowl in one go,\u201d said Hector Torres, an Argentine former IMF director.<\/p>\n

Milei\u2019s team has a lengthy menu of options to choose from. The government has already started to remove barriers for importers to send money overseas. Experts say some minor financial regulations, such as holding peso government bonds for a minimum of 24 hours, may be removed with limited fallout.<\/p>\n

Others regulations are harder to cut. A restriction that prevents multinational companies from transferring profits overseas, for example, is keeping some $10bn worth of pesos in Argentina that would be probably converted to dollars if the rule was scrapped, according to consultancy Fundaci\u00f3n Capital.<\/p>\n

Central bank president Santiago Bausili said in November that such stockpiles were \u201cthe main impediment to lifting controls\u201d and that the government was prioritising restrictions on future flows of money.<\/p>\n

One key regulation in the IMF\u2019s crosshairs is the government\u2019s regime for Argentina\u2019s crucial agricultural exporters, who must convert 80 per cent of their dollar earnings with the central bank but can divert the remainder into a parallel market for a better exchange rate. That cost the central bank up to $12bn in potential reserve inflows last year.<\/p>\n