Every morning, Carlos Abons and his six employees visit hardware stores around Buenos Aires, delivering electrical supplies and encouraging customers to place new orders with his family-run business. But this Monday was different for them.
President Javier Milei was about to debut his plan to dismantle most of the currency controls in place for the past five years, a core pillar of Argentina’s new US$20-billion programme with the International Monetary Fund. In the streets of Buenos Aires, Abons ordered his team to hold on.
“We decided not to push to sell,” said the 73-year-old salesman from Dalessandri, a distributor of electrical materials. “Our sales were zero.”
His fears that the newly floating currency could leave him selling products for less than it would cost to replace them were immediately confirmed by traders Monday morning. The peso depreciated 10 percent when official markets opened, weakening to 1,195 per dollar from 1,076 at Friday’s close.
Milei’s decision to ease currency controls is having an impact in the real economy. Retailers and importers are cautiously adjusting their prices as the peso weakens. And some fear it could spark inflation, a giant that Milei managed to mostly tackle in his first year in office. The question is whether this time could be different.
Private consulting firms have raised their inflation forecasts for 2025 even as they express optimism about Milei’s new economic policies. The President is floating the peso before key midterm elections in October, but after achieving fiscal and trade surpluses during his first year in office.
Half of the effect of the peso’s depreciation will be concentrated in the next three months, according to Juan Pablo Ronderos, a partner in charge of economics and markets at Argentine consultancy firm MAP. Ronderos raised MAP’s forecast for annual inflation by 10 percentage points to 33 percent.
“We are concerned about the pace of core inflation in March, and to this will be added a pass-through of the devaluation,” Ronderos said.
Other firms to raise their forecasts include consultancy firm FMyA, which now sees inflation at 32 percent this year instead of the 25 percent it forecast last week.
Many traders of imported products have decided to immediately pass on the 10-percent exchange rate jump to their customers. The reason is simple: many products are invoiced in dollars, but expressed in pesos at the official exchange rate of the day. Some prices for domestic products, many of which have imported inputs, are also rising.
“We are considering a 10-percent increase for domestic products,” Abons said. “They are surely going to increase and when I go to replace it, I could probably lose money.”
Economists and businesses see two reasons why inflation isn’t expected to get out of hand for now, compared to other abrupt devaluations in recent years. One is there is widespread confidence in Milei’s economic programme and many people believe the peso won’t continue to fall aggressively. The other is that demand is so depressed that companies simply cannot afford to raise prices sharply.
Retailers are in a delicate position. On the one hand, imported products became more expensive overnight. On the other, there is little appetite in the market to absorb higher prices.
“Passing on a 10-percent direct increase to the consumer all at once is risky with such low demand,” said Manuel Loitegui, product manager of the Puppis chain of pet stores, which imports nearly everything from China.
In the construction materials industry, the pattern is similar. Those who sell imported products have passed on their costs directly.
“There were some adjustments, but my feeling is that nobody wants this to go to hell,” said Pablo Gaitán, who runs Corralón Ciudadela, a lumberyard outside Buenos Aires. “We try to be careful. We all want to sell.”
Fernando Furci, the director general of the Cámara de Importadores de la República Argentina (Argentine Chamber of Importers), is used to sales grinding to a halt for days during this kind of event. However, he believes that importers behaved differently this time.
“Some are delivering goods with open invoices, and settling the prices later,” he said, adding that it shows real confidence in the situation. “Demand is weak. Margins are slim. Companies are studying every move. Nobody is in a position to act aggressively.”
by Ignacio Olivera Doll, Bloomberg
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