Milei devalues peso by 54% in first batch of shock measures

Argentina devalued the peso by 54 percent and announced a swathe of spending cuts as the first steps of President Javier Milei’s shock-therapy programme to revive the nation’s troubled economy.

The newly inaugurated administration weakened the official exchange rate to 800 pesos per dollar, Economy Minister Luis Caputo said in a televised address after the close of local markets on Tuesday.

“There is no more money,” Caputo said repeatedly in the recorded video, adding that Argentina needs to solve its “addiction” to fiscal deficits.

Other measures announced including halving the number of ministries, cutting transfers to provinces and suspending public works. The government will also reduce subsidies on transport and energy sectors, among others. At the same time, Argentina will boost certain social welfare programmes, Caputo said.

The dramatic first steps follow a somber inauguration speech on Sunday, when Milei warned that Argentines will have to endure months of pain while he works to pull the country from the economic crisis inherited from his predecessor. Inflation is already running at more than 140 percent annually, and prices are expected to jump between 20 percent and 40 percent in the months to come, the president said.

The government had closed Argentina’s export registry Monday, a technical step that often foreshadows a currency devaluation or major policy change. The Central Bank also announced Monday the official currency market would operate with limited transactions — a restriction it said it will lift on Wednesday.

Inevitable

The devaluation was long seen as inevitable. In the run-up to Milei’s inauguration, markets were signalling a currency drop of about 27 percent in the first week of the new government, while investment banks like JPMorgan Chase & Co and local private advisory firms suggested it could weaken about 44 percent. Grocers had already increased prices and banks were offering sharply weaker retail exchange rates hours before the Tuesday announcement.

Argentine authorities have for years slowed the peso’s decline in the official market through currency controls and import restrictions in an attempt to protect dwindling reserves. That hodgepodge of capital controls has spurred at least a dozen exchange rates, hampering business and restricting investment in South America’s second-largest economy. On the campaign trail, Milei pledged to scrap the currency altogether, replacing it with the US dollar.

On December 7, the prior administration had let the peso slip by about five percent, while simultaneously limiting the amount of greenbacks banks could hold in order to prevent them from hoarding dollars. The government had been burning reserves to keep the currency largely steady at 350 per dollar since the August primary vote, when Milei’s surprise showing sent markets into a tailspin. In parallel markets, that rate is about 1,000.

Milei rally

Since being spooked by his emergence in the August primary, investors have changed tack on the firebrand libertarian, cheering on his first steps as president-elect — namely, his decision to pick Wall Street veterans for some of the main cabinet positions while distancing himself from more radical proposals including dollarising the economy and shuttering the Central Bank. As he begins his four-year term, the rally will be put to the test.

Caputo previously served as finance chief in the administration of Mauricio Macri, when he negotiated a US$16.5-billion deal with holdout bondholders, allowing Argentina to return to international capital markets. Amid a currency run in 2018, Macri tapped him to take over at the central bank, but he only served for a few months before unexpectedly stepping down amid tensions with the International Monetary Fund.

Caputo has tapped longtime colleague Santiago Bausili, a Deutsche Bank and JPMorgan Chase & Co veteran, to run Argentina’s Central Bank.