(Bloomberg) — Four months after coming to power, Argentine President Javier Milei achieved a crucial feat in a country long ravaged by soaring inflation: he stabilized the currency.
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In fact, the peso has not only stopped plunging day after day, but in a key foreign exchange market – there are plenty of them here, a byproduct of the country’s Byzantine web of rules – it is actually rising sharply. The peso has climbed 25% against the dollar over the past three months in the market, known as a prime swap used by many investors and businesses. That’s more than the gains recorded by any of the 148 currencies tracked by Bloomberg against the dollar.
This is a shocking statistic in a country where the currency seems to be in a state of endless free fall. (The smallest annual decline in the past decade was 15%.) And it underscores Milei’s efforts to rein in bloated government spending, stifle demand for everything in the economy, including the dollar, and rein in the inflation which skyrocketed to a record level. annual rate of nearly 300%.
Milei likes to call his budget cuts “the biggest in human history.” He’s certainly exaggerating, of course, but not by much. The cuts he imposed represent the equivalent of nearly 4% of the country’s economic output, an adjustment so aggressive that central bank officials estimate it represents more than 90% of all those made worldwide over the last decades.
Read more: Milei sees long work ahead to implement reforms in Argentina
There are dangers, to be clear, everywhere for Milei and his strong peso policy. On the one hand, spending cuts have plunged the economy into a deep recession. And as Argentines, already hit by inflation, lose their jobs, political pressure to scale back its fiscal program will increase, analysts warn. He was forced to rely on stopgap measures to gut the budget because his broader reform agenda faced resistance from Congress, a sign of the political fragility of his economic plan.
“The big news in Argentina is that the person in charge is not worried about the political cost of austerity, which is unusual,” said Javier Casabal, research director at AdCap Grupo Financiero in Buenos Aires. “The government’s objective will remain to curb inflation.”
Which brings us to the next big risk: that inflation won’t fall as quickly as Milei’s team envisions.
Not only would this anger Argentine consumers, it would further increase the value of the currency in inflation-adjusted terms. Since the peso began to stabilize in January, it has gained about 72% after adjusting for inflation, an indicator that Argentine investors watch closely because it measures changes in the real purchasing power of the cash.
Read more: Milei Team Finds Inflation Slowing Faster Than Market Expects
These gains are beneficial for a country until…
