Argentina peso devalued over 50% as markets welcome Milei's 'tough pill'

Argentina peso devalued over 50% as markets welcome Milei's 'tough pill'

By Libby George and Jorge Otaola

Argentina's government allowed the peso currency to plunge over 50% to 801 per dollar on Wednesday as markets cautiously welcomed the first details of President Javier Milei's plans to shock Argentina's beleaguered economy back on track.

The libertarian president's administration swept to office with promises of drastic economic reforms to tackle negative net foreign currency reserves, entrenched capital controls, inflation racing towards 200% and years of economic stagnation.

The rapid devaluation is part a raft of measures announced late on Tuesday by new Economy Minister Luis Caputo, which also include slashing energy subsidies, cutting down the size of government and halting public works tenders in an attempt to cut the deficit to zero.

"The news is positive," said Argentina expert Bruno Gennari at KNG Securities. "It is a massive fiscal effort, with 3 ppts of GDP of spending cuts and 2.2% of additional revenues."

International sovereign dollar bonds gained more than 2 cents to trade between 35.7-41.25 cents on the dollar, many at their highest level since 2021. On average bonds were up 3%.

U.S.-listed shares of Argentine firms were mixed in early trading, with state oil firm YPF up 1.3%, while financials such as Grupo Supervielle and Grupo Financiero Galicia slid 2.7% and 1.7% respectively.

"Non-deliverable" FX forwards moved sharply, showing bets that the peso's value would continue to dive. One-year forwards hit a level of 1,687.

Analyst Salvador Vitelli said the devaluation was "a little more than what the market expected," and a long way from the 2002 exit from convertibility, before which the peso had been one-to-one with the dollar for a decade.

The black market peso - a popular benchmark for the currency's true value after years of capital controls that tightly limit access to official exchange markets - dropped around 7% to 1,150 per dollar. However, the gap with the official rate narrowed sharply to 44% from 191% on Tuesday.

Argentina has artificially controlled the peso since 2019, creating a wide gap between the black-market rate and the official exchange rate, which was at 366 per dollar before Caputo's announcement that it would move to 800, with further plans for a monthly 2% devaluation.

'TOUGH PILL TO SWALLOW'

The IMF, which had previously hardened its view on the state of its $44 billion program with Argentina, welcomed the "bold" changes that it said could help stabilize the economy and spur growth.

Jimena Blanco, chief analyst with Verisk Maplecroft, said the government was trying to temper an otherwise guaranteed crash-landing.

"He promised a very tough pill to swallow and he's delivering that pill," she said. "The question is how long will popular patience last in terms of waiting for the economic situation to change."

In a note, Barclays said the "governability" of the reforms would be the key challenge, as they could sharply accelerate inflation and spark a recession.

The central bank on Wednesday said it would hold interest rates at 133% and put the peso on a 2% monthly crawling peg devaluation path.

Caputo also unveiled a 2.9% of GDP cut to government spending, with nearly 1 percentage point of it coming from cuts to energy and transport subsidies, and outlined some new taxes.

"This government has not been left with a patient with a toothache. We have found a patient in intensive care on the verge of dying," presidential spokesman Manuel Adorni told a press conference on Wednesday.

"We are going to do everything we can not only to bring down the fever, but to save him from the disease that is killing him."