What’s going on with the Argentina peso (USD/ARS) in Javier Milei era?

The Argentine peso has plummeted as the new administration by Javier Milei takes shape. Data compiled by TradingView shows that the USD/ARS exchange rate soared to over 800, much higher than its August low of 287.78. It has jumped by more than 358% this year, making it almost worthless.

USD/ARS chart by TradingView

Argentine peso future in peril

Argentina’s currency future is in peril as the new administration by Javier Milei implements its policies. Last week, the currency tumbled by more than 50% after the government unveiled an economic shock therapy to deal with the current crisis.

The sharp deterioration of the currency means that the lives of all Argentines will continue deteriorating. In a statement, the economy minister warned that the situation will get worse before it gets better over time.

Inflation is expected to remain at an uncomfortable level as the government slashed subsidies. As we have seen in Nigeria, ending subsidies coupled with a falling currency leads to higher prices. The situation is worse in Argentina, which imports most of its items.

Meanwhile, the government is in the process of cutting spending across all sectors. Milei hopes to eliminate the budget deficit by 2024. The theory is that uncontrolled government spending leads to higher inflation. On Wednesday, the government unveiled policies to deregulate the economy in a bid to make the country attractive to investors.

As part of the deregulation process, the government will also implement privatisation policies to take most parastals from the hands of the government. While these policies are the right ones, the reality is that they will not be popular and could lead to protests. 

The other important news that moved the Argentine peso is a new debt auction of about 2.9 trillion pesos ($3.7 billion). The government aims to use these funds to unravel a load of short-term central bank arrears held by local creditors.

Outlook for the Argentine peso

Argentina finds itself in uncharted territory as the new libertarian president seeks to radically change its trajectory. I believe that most of his actions are the correct ones, especially on deregulation and spending cuts.

However, the implication is that life for most people will get worse, as we have seen in Nigeria. In his new weeks as president, Nigeria’s president devalued the naira and removed subsidies that were costing the government billions of dollars per year. 

The challenge for Argentina is that it needs to spend money domestically and service its mountain of debt. It is the most indebted nation with the IMF with over $31 billion in outstanding debt. This means that another default cannot be ruled out in the coming years.

The implication is that the Argentine peso will likely continue to depreciate against the US dollar and other currencies. My base case is where the USD/ARS pair rises to 1,000 in the coming months.