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 yesterday, 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 .MERV 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.
