Argentina's Milei government is facing a peso crisis, with Wall Street widely believing the peso is severely overvalued and requires a 20% or greater devaluation to escape economic difficulties and meet IMF requirements. However, ahead of crucial elections, significant devaluation would undoubtedly be a political gamble. While a strong peso has effectively controlled inflation, it is increasingly dragging down the economy, leading to Argentines shopping overseas and beef imports.
The fate of the Argentine peso is becoming crucial to whether the Milei government can weather the crisis.
According to recent reports, Wall Street analysts' consensus is that the Argentine peso is severely overvalued and requires substantial devaluation to help the Milei government escape its current predicament.
Barclays states that Argentina's real effective exchange rate needs to depreciate by up to 30% to stimulate the economy, while StoneX and local brokerage One618 believe the peso is overvalued by approximately 20%.
Juan Manuel Pazos, chief economist at One618, noted that to meet the terms of the $20 billion agreement approved by the International Monetary Fund (IMF) earlier this year - achieving an annual current account surplus of approximately $10 billion - the peso-to-dollar exchange rate needs to reach 1650-1700 levels, compared to Monday's closing price of 1408. StoneX analyst Ramiro Blazquez also believes a peso-to-dollar rate of 1500-1600 would be "more reasonable" for Argentina.
However, for Milei facing political pressure ahead of crucial elections, this represents an extremely risky option.
Despite economic logic pointing toward devaluation, political reality presents an obstacle for the Milei government. Markets widely expect that ahead of the crucial October midterm elections, Milei can hardly allow significant peso weakness, especially after electoral defeats in local elections two weeks ago.
Recently, due to unexpected heavy losses by Milei's party in Buenos Aires provincial local elections, investor confidence in the Milei government wavered, triggering a sell-off wave against the Argentine peso. To defend the exchange rate, Argentina's central bank sold over $1 billion in foreign exchange reserves within three days.
Against this backdrop, any devaluation moves that could trigger price increases would be tantamount to a political gamble. As One618 economist Pazos stated: "After the elections, the government will need to move in that direction - if they dare."
**Strong Peso: From Anti-Inflation Tool to Economic Drag**
A strong peso and fiscal austerity were the two pillars Milei used to stabilize the economy and tame hyperinflation. This strategy achieved significant success in controlling inflation, with the country's annualized inflation rate falling from over 200% a year ago to the current 33.6%.
However, analysts indicate that the peso's overvaluation is increasingly expanding, causing unease in this country with a long history of devaluation and default.
The costs of a strong currency are also increasingly apparent. Due to the overvalued domestic currency, more and more Argentines are choosing to shop overseas; even Argentina, famous for producing high-quality beef, sees its meat processors beginning to import beef because it's more cost-effective than using local products. Meanwhile, fiscal austerity policies are also somewhat dragging down economic growth, plunging the economy into difficulties.
**US "Helping Hand": Remedy or New Problem?**
Amid market turbulence, the Milei government received strong support from the Trump administration on Monday. US Treasury Secretary Yellen promised to provide Argentina with "all stabilization options." This statement drove Argentine assets higher for the second consecutive day, with the peso rising 3.8% on Tuesday and dollar bonds rallying across the board.
However, this external support could be a double-edged sword. Brookings Institution economist Robin Brooks commented on social platform X that Yellen's remarks were "a big deal," with the promise itself sufficient to boost the peso without any actual intervention.
But he warned: "The problem is this makes Argentina's overvaluation problem worse, not better." The prospect of US assistance could boost market demand for the peso, making the goal of achieving currency recalibration even more difficult. More details are expected to be announced after Milei meets with US President Trump in New York.
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