Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Argentina devalues peso, cuts spending to treat fiscal deficit 'addiction'

Published 12/12/2023, 07:48 AM
Updated 12/13/2023, 05:35 AM
© Reuters. FILE PHOTO: Argentina's Minister of Economy Luis Caputo speaks to the press, one day after the inauguration of Argentina's President Javier Milei, in Buenos Aires, Argentina, December 11, 2023. REUTERS/Agustin Marcarian/File Photo

By Jorge Otaola and Walter Bianchi

BUENOS AIRES (Reuters) -Argentina will weaken its peso over 50% to 800 per dollar, cut energy subsidies, and cancel tenders of public works, new Economy Minister Luis Caputo said on Tuesday, economic shock therapy aimed at fixing the country's worst crisis in decades.

Caputo said the plan would be painful in the short-term but was needed to cut the fiscal deficit and bring down triple-digit inflation, as he unveiled a package of measures after libertarian President Javier Milei took office on Sunday.

"The objective is simply to avoid catastrophe and get the economy back on track," Caputo said in a recorded speech.

He said the country needed to tackle a deep fiscal deficit he put at 5.5% of GDP, adding Argentina had a fiscal deficit for 113 of the last 123 years - the cause of its economic woes.

"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 major grains producer, is battling inflation nearing 150%, central bank reserves deep in the red and two-fifths of the population in poverty. It has a wobbling $44 billion loan with the International Monetary Fund.

"I welcome the decisive measures," IMF chief Kristalina Georgieva said, calling it "an important step toward restoring stability and rebuilding the country's economic potential."

The IMF called the measures "bold" and said in a statement they would "help stabilize the economy and set the basis for more sustainable and private-sector led growth" following "serious policy setbacks" in recent months.

The country'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 FX rate to 700.

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


Milei, a wild-haired political outsider, had campaigned with pledges for major spending cuts, often wielding a chainsaw at rallies as a blunt symbol of his plans to trim back the state.

"The situation is critical with 45% poverty and 200% annualized inflation," presidential spokesperson Manuel Adorni earlier told a press conference. "We are heading towards hyperinflation and the objective is to avoid it.

Milei's tough fiscal rhetoric - with a new mantra "there is no money" - has buoyed markets since his election win, with the S&P Merval stock index hitting a record high on Tuesday and sovereign bonds up nearly 4%.

Analysts said the new measures sent a strong message.

"The devaluation announced exceeded market expectations," said Shamaila Khan, Head of Fixed Income for Emerging Markets and Asia Pacific at UBS Asset Management.

"Some details were announced on the fiscal adjustment that will be needed such as reduction of subsidies and decrease in public expenditure. Implementation will be key."

Caputo, echoing previous pledges by Milei, said the government would look to gradually erase export tariffs, something farmers have long sought. Argentina is a top exporter of processed soy oil and meal, and the no. 3 for corn.

The grains sector is expected to meet with the government late on Tuesday, Reuters reported earlier citing sources.


The key doubt is whether Milei, whose libertarian coalition is only the third largest bloc in Congress, can implement the sharp cuts needed to undo the deep fiscal deficit without pushing the South American country towards turmoil and unrest.

"The adjustment will be painful, and the path forward is laden with economic, political and social risks," Fitch Ratings said in a report.

"Milei's party has little representation in the legislature and controls no provincial governorships, alliances with more influential parties and power-brokers remain in flux, and the social situation is fragile."

© Reuters. FILE PHOTO: Argentina's Minister of Economy Luis Caputo speaks to the press, one day after the inauguration of Argentina's President Javier Milei, in Buenos Aires, Argentina, December 11, 2023. REUTERS/Agustin Marcarian/File Photo

The central bank, which had new president Santiago Bausili confirmed overnight in the official gazette, said it would undo "transition" checks on FX trades from Wednesday morning that had only allowed priority trades through this week.

The Economy Ministry posted on Twitter that the central bank would announce measures on Wednesday related to the interest rate, debt and monetary policy to complement its own measures.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.