Argentina devalued the peso by 54% and announced a set of measures to reduce spending as the first steps of the shock therapy program launched by President Javier Milei to rescue the country's troubled economy.
Luis Caputo, Minister of Finance said in a televised speech, after local markets closed on Tuesday, that the newly installed administration lowered the official exchange rate to 800 pesos to the dollar, compared to the level of 366.5 to the dollar before the announcement.
“There is no more money,” Caputo repeatedly said in the recorded video, adding that Argentina needed to address its “addiction” to fiscal deficits.
Other measures were announced including halving the number of ministries, reducing transfers to the provinces and suspending public works. The government will also reduce subsidies to the transportation and energy sectors, among other sectors. At the same time, Argentina will strengthen some social welfare programs, Caputo said.
The dramatic first steps come on the heels of a somber inauguration speech last Sunday, when Miley warned that Argentines would have to endure months of pain as he worked to dig the country out of the economic crisis inherited from his predecessor. The president said that inflation levels are at more than 140% annually, and prices are expected to jump between 20% and 40% in the coming months.
The government closed the Argentine export register on Monday, a move that often heralds a devaluation or a major policy change, and the central bank also announced on Monday that the official currency market would operate with limited transactions, a measure it said would be canceled on Wednesday.
Devaluation has been a long time coming. Before the president's inauguration, markets were indicating that the currency would decline by about 27% in the first week of the new government, while investment banks such as JP Morgan and local private consulting firms indicated that it could weaken by an estimated 44%. Grocery stores had already raised prices, and banks were offering sharply weaker retail exchange rates hours before Tuesday's announcement.
Argentine authorities have for years slowed the depreciation of the peso on the official market through currency controls and import restrictions in an attempt to protect dwindling reserves. This patchwork of capital controls has led to the emergence of at least a dozen exchange rates, hindering business and restricting investment in South America's second-largest economy. During the election campaign, the president pledged to completely abolish the currency and replace it with the US dollar.
On December 7, the previous administration allowed the peso to decline by about 5%, while at the same time limiting the amount of dollars that banks could hold in order to prevent them from hoarding the US currency. The government has been burning through reserves to keep the currency largely steady at 350 pesos to the dollar since the August primary, when Miley's surprise performance sent markets into disarray.
In parallel markets, this rate is about 1,000 pesos per dollar.
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