Javier Milei’s presidency faces challenges due to stringent currency and capital controls hindering foreign investment in Argentina. Although some measures were eased, strict regulations remain. As discussions with the IMF evolve, the approach to lifting these controls will significantly impact economic conditions ahead of critical midterm elections.
Since Javier Milei became president, strict exchange controls have hindered foreign investment in Argentina. Although Milei has attempted to relax these restrictions throughout his first year, significant hurdles persist as these measures have been in place for six years and some have even been tightened. Argentina’s strategy for lifting these controls is crucial to ongoing negotiations with the International Monetary Fund (IMF) regarding a new program to replace the expiring $44 billion agreement in December.
Market indicators, specifically the Rofex futures market, reflect investor expectations that the peso will continue to depreciate at a government-mandated rate of about one percent monthly, which falls below current inflation levels. Concerns exist that the restrictive measures may last until the midterm elections, where Milei aims to bolster voter support. A strategist from Balanz Capital Valores noted, “The market is not pricing in the lifting of currency and capital controls before the elections.” Furthermore, Milei’s administration suspended congressional primaries to consolidate support before the October elections.
Foreign direct investment into Argentina has dropped significantly, with inflows reported at only $89 million in 2024, the lowest figure since 2003, as indicated by the Central Bank. Additionally, current account deficits in the private sector have surged to $952 million, tripling the previous year’s shortfall of $342 million. Only six significant foreign investments qualified for a program known as RIGI in 2024, each having under $10 billion in project volumes, with future foreign investment estimates set at $1.4 billion for 2025.
Experts anticipate that the government is unlikely to lift currency controls ahead of the midterm elections due to fears of fueling inflation. As Juan Carlos Barboza of Grupo Mariva stated, “They don’t want inflation to become volatile or spiral out of control.” Milei, however, expressed intentions in February to lift most controls by January 1, 2026. Nonetheless, he suggested potential acceleration of this timeline contingent on fresh IMF loans.
Current restrictions facing investors include a cross-restriction rule barring dollar purchases in the spot market within a specified timeframe related to parallel market transactions, and mandatory bank account deposits for dollar transactions associated with securities. Additional limitations include a daily purchase cap of 200 million pesos (~ $190,000) for foreign investments, a required one-day holding period of assets before exchanging them for dollars, and a cap of $200 on foreign currency purchases for savings and credit card payments abroad. Furthermore, regulations prevent multinational companies from transferring dividends abroad and impose restricted access to dollars for imports.
Recent regulatory changes by the Central Bank have intensified the control measures, hindering corporate bond sales abroad and limiting foreign currency sales by agricultural exporters hoping to benefit from tax relief on exports. The pace of peso depreciation has also been cut, now set at one percent monthly, adversely affecting exporters. To address these issues, significant tax reductions for certain exports were implemented in January.
Concerns about lifting controls could lead to a steep depreciation of the peso, potentially driving local prices up and undermining disinflation efforts. Annual inflation rates, however, have decreased from 211 percent to 118 percent under Milei’s leadership, which he cites as a key accomplishment for the midterm elections. Argentina’s net international reserves hover around $28.7 billion, and after accounting for short-term liabilities, net reserves stand at minus $4.5 billion, highlighting the precarious economic environment.
In conclusion, Javier Milei’s administration grapples with stringent currency and capital controls that deter foreign investment in Argentina. Despite attempts to ease these restrictions, investor confidence remains low. Upcoming elections add another layer of complexity as Milei balances the need for economic stability against the pressures of inflation and political support. The potential lifting of controls is contingent upon negotiations with the IMF and the overall economic landscape as Argentina heads into a critical fiscal period.
Original Source: www.batimes.com.ar
