Argentina’s new government devalues peso by more than 50%

Argentina has devalued its currency, the peso, by more than 50% as part of a package of large-scale spending cuts intended to address the country’s worst economic crisis in decades.

The plans, introduced under the newly inaugurated administration of Javier Milei, include cutting energy subsidies and cancelling tenders for public works.

His economy minister, Luis Caputo, moved to weaken the official exchange rate to 800 pesos a dollar – it had been 366.5 – in a televised address after the local markets closed on Tuesday. He said the central bank would target a monthly devaluation of 2%.

Caputo said the moves, which were welcomed by the International Monetary Fund (IMF), would be painful in the short-term but were needed to cut the country’s fiscal deficit and bring down soaring triple digit inflation.

Argentina’s central bank is due to announce new monetary measures on Wednesday.

“The objective is simply to avoid catastrophe and get the economy back on track,” Caputo said, in a recorded speech. “There is no more money.”
 

I welcome the decisive measures announced by President @JMilei and his economic team today to address 🇦🇷 Argentina’s significant economic challenges—an important step toward restoring stability and rebuilding the country’s economic potential.https://t.co/1zZRES9anE

— Kristalina Georgieva (@KGeorgieva) December 12, 2023

He said the country needed to tackle a deep fiscal deficit he put at 5.5% of gross domestic product, arguing that Argentina had an “addiction” to fiscal deficits, 113 over the last 123 years.

“We’re here to solve this problem at the root,” he said. “For this we need to solve our addiction to a fiscal deficit.”

The South American country, a large grain producer, has an inflation rate nearing 150%, central bank reserves deep in the red and two-fifths of the population in poverty. Other measures announced include halving the number of government ministries.

“I welcome the decisive measures,” said Kristalina Georgieva, the managing director of the IMF, calling it “an important step toward restoring stability and rebuilding the country’s economic potential”.

The IMF described the measures as “bold” and said they would “help stabilise the economy and set the basis for more sustainable and private sector-led growth” after “serious policy setbacks” in recent months.

Argentina’s foreign exchange and grains markets had been locked down on Tuesday as traders awaited the new government’s economic plan. Banks had already anticipated a sharp devaluation, with some weakening their foreign exchange rate to 700 pesos a dollar.

Since 2019, the Argentinian peso has been kept artificially strong by strict capital controls that create a wide gap between the official exchange rate of 366 a dollar and parallel rates as high as 1,000 a dollar.

“We’re always worse off because our response has been to attack the consequences but not the problem,” Caputo said in his address. “What we’ve come to do is the opposite of what they always did, and that’s solve the root problem.”