Milei’s strong peso is holding back Argentina’s economic growth

President Javier Milei’s efforts to tame inflation with a strong currency are taking a growing toll on Argentina’s economy.

The peso has weakened just 3.7 percent against the dollar while consumer prices have risen 21.3 percent so far this year through August. That real appreciation has increasingly been sustained in recent weeks by official intervention in bond and futures markets, while currency controls on companies remain in place.

The INDEC national statistics bureau will publish second quarter gross domestic product figures Thursday afternoon and analysts forecast that the economy contracted 0.9 percent from the previous quarter. For many, Milei’s currency is one of the key factors hindering Argentina’s growth. 

“By now, it has been well established that Argentina’s non-primary economic activity is performing poorly, posing risks to policy continuity,” Barclays analyst Ivan Stambulsky said in a report to investors last week. “In our view, the main explanation is simply that the real effective exchange rate is too strong for the current policy mix.”

The libertarian leader has cooled price hikes for much of his presidency in part by keeping a tight grip on the peso, making it appreciate when adjusted for inflation.

In the first half of the year, dollars flowed in from the soybean harvest amid heavy overseas debt issuance by Argentine companies, providing ample foreign currency and helping the central bank rebuild reserves without putting much pressure on the peso.

That backdrop began to change in the second half of the year. Dollar inflows from agricultural exports slowed after the harvest peaked, while proceeds from corporate borrowing also eased. As dollars dried up, the Central Bank has increasingly turned to selling FX-linked securities and futures contracts to meet hedging demand and ease pressure on the peso while still trying to build reserves.

As a result, the stock of hedges tied to the exchange rate more than doubled in just five months, according to estimates from local brokerage Facimex. Altogether, private-sector holdings of futures contracts, dual bonds and securities known locally as dollar-linked rose to around US$12 billion by the end of August from US$5.2 billion at the end of March.

“There is a strong degree of BCRA intervention,” Stambulsky said, referring to the Central Bank by its Spanish initials. As the market began unwinding carry trades after the peak harvest, the monetary authority “stepped up intervention by selling hedges, it reduced the pace of spot purchases, and it allowed rates to rise.”

August, September and October are usually months when the Central Bank sells dollars directly in the spot market. But this year the government changed its strategy by selling dollar-linked instruments outside of it. 

The strategy has helped keep the exchange rate near 1,500 pesos per dollar, much stronger than economists had envisioned. A year ago, analysts surveyed by the Central Bank expected the peso to weaken to 1,811 per dollar by December 2026. By last month, they had revised that forecast to 1,629.

In an economy already burdened by high taxes and elevated costs, an appreciated peso makes domestic producers less competitive while making imports cheaper, squeezing local industry.

That dynamic is weighing on an economy already losing momentum. Economists have cut their full-year 2026 growth forecast to 2.1 percent from 3.5 percent several months ago.

Milei’s policies have slowed monthly inflation sharply, from 25.5 percent in his first month in office to 1.7 percent in August. But progress has become more difficult since the Iran war broke out. Inflation, which Milei had expected to fall below one percent by now, has remained stubbornly closer to two percent.

“What the government wants, and fast, is for inflation to slow down,” said Osvaldo Giordano, president of IERAL, an economic think tank at Fundación Mediterránea. The strong peso reflects both the government’s determination to achieve that goal and the market’s expectation that it has the tools to keep doing so, he said.

The same policies supporting the currency are putting pressure elsewhere. Higher interest rates are weighing on credit, which had become an important engine of the recovery after years of high inflation largely shut households and businesses out of financing. Yet since midterm elections last October, household defaults have broken records month after month.

The strain is particularly visible in manufacturing, retail and construction — labour-intensive sectors that employ large numbers of Argentines and have lagged the expansion in areas such as energy, mining and agriculture. Construction shrank 4.5 percent from a year earlier in August, while manufacturing contracted 4.9 percent.

That poses a growing political dilemma for Milei as he prepares to seek re-election next year.

“Perhaps it would be less risky to worry less about how quickly inflation comes down and instead provide some relief to urban sectors like industry, commerce and construction,” Giordano said. “Those are the sectors most Argentines live off of, and they’re also where the data show the greatest destruction of economic activity and jobs.”