[[{“value”:”Complicating the recovery is the overvalued peso, which is making the country unjustifiably expensive in dollar terms. The official exchange rate is currently set by the government, which also imposes capital controls. Almost all of the devaluation in December has been eroded (see chart 2). It involved initially devaluing the peso by over 50% and
The post Milei update appeared first on Marginal REVOLUTION.”}]]
Complicating the recovery is the overvalued peso, which is making the country unjustifiably expensive in dollar terms. The official exchange rate is currently set by the government, which also imposes capital controls. Almost all of the devaluation in December has been eroded (see chart 2). It involved initially devaluing the peso by over 50% and then by 2% each month. But monthly inflation has been greater than the crawling peg. The result is that the real effective exchange rate is rising.
The effects are obvious from atop the Andes. On a single long weekend in April some 40,000 Argentines crossed the mountains into Chile to buy everything from trainers to car tyres because, surreally, Chile has become cheaper than Argentina. Mr Milei slams those who say the peso is overvalued as “intellectually dishonest”. Yet when an Argentine president says there won’t be a devaluation, taxi drivers know there is a good chance there will be one, quips Nicolás Gadano of Empiria Consulting in Buenos Aires.
A pricey peso scares off tourists, makes exports expensive and deters investors. An overvalued currency often eventually crashes. “If you see Argentina appreciating, this is always a sign of worse things to come,” says Eduardo Levy Yeyati of Torcuato Di Tella University in Buenos Aires. Falling exports make it harder for the central bank to accumulate dollars, which it needs to pay off foreign debts and to build up its safety buffers.
The government could allow the peso to float or accelerate the 2% crawling peg. But either would probably push up inflation, thus endangering Mr Milei’s popularity and undermining some of the benefits of the devaluation. For now, Mr Milei is able to keep a tight grip on the exchange rate because of capital controls.
What happens next? Mr Milei has promised to ultimately remove capital controls as part of his plan to restore investor confidence. He insists that inflation will soon be 2% a month, the same as the rate of devaluation. This, he says, would allow him to slowly ease the restrictions and float the peso without its value plunging.
Here is more from The Economist. File under “difficult balancing act, nor is this market prices working their magic.”
The post Milei update appeared first on Marginal REVOLUTION.
Current Affairs, Economics
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