The exchange rate of the peso against the dollar is a sensitive issue in Argentina. With the same daily routine with which weather forecasts are consulted in many countries, Argentines examine the value of their currency on the foreign exchange market and successive governments have done everything possible to maintain a balance that avoids sudden devaluations that trigger prices and excessive appreciations that make their exports less competitive. In April, Javier Milei’s government lifted foreign exchange restrictions in place for individuals since 2019 and imposed a system of floating bands whose upper and lower limits were updated to 1% per month, less than half inflation. Eight months later, it gave in to market pressure and changed its foreign exchange strategy again. From January, the band caps will be updated at the same rate as the Consumer Price Index (CPI).
The resolution announced this Monday by the Central Bank buries a project that many voices considered untenable. As the bands were updated by 1% and inflation rose, the cap became lower and lower in real terms. The situation worsened last quarter, when the CPI exceeded 2% month-on-month.
But today, the national currency could be devalued at a pace appropriate to prices. The new strategy will facilitate the accumulation of international reserves guaranteeing the payment of debt maturities that Argentina will face next year. In April, one of the conditions imposed by the International Monetary Fund on Milei for providing a $20 billion loan was to agree on a timetable for reserve accumulation. The Argentine government will close 2025 without having fulfilled this commitment and is negotiating a give up (sorry) with the organization to avoid a penalty. The announced change is a sign of goodwill to complete the outstanding task by 2026.
“Argentina decided that the accumulation of reserves was not a priority and today we are 14.5 billion dollars from the objective,” warned financial analyst Christian Butler last week in “Once again, the government must give in and accept what the market consensus demands. Reserves must be purchased,” Butler stressed.
The Central Bank’s gross international reserves are approximately $42 billion. According to the IMF methodology, net reserves are negative by more than $15 billion if we take into account, among other things, private sector foreign currency deposits, swap operations (currency exchange) with China and the United States and debt maturities with international organizations. This is a figure far from that agreed with the IMF for 2025, which envisaged reducing the red account to less than 1.5 billion dollars.
On January 9, the Treasury must pay principal and interest for $4.2 billion. It has around 1.5 billion if we add the recent placement of dollar debt in the Argentine market and Treasury shares in the Central Bank’s accounts. To finalize the payment, the Government can use the to exchange agreed with the United States for 20 billion dollars, of which they already activated 2.5 billion in October, but this decision would widen the negative balance.
The lack of international reserves is one reason why Argentina’s country risk – which measures the gap between the interest paid by a country on its debt and the interest paid by the US Federal Reserve – remains above 600 basis points. Argentina must drop to at least 500 points to regain access to international markets.
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