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Updated Dec 13, 2023, 12:27pm EST
businessSouth America
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Argentina’s ‘shock therapy’ cuts peso in half

Insights from La Nación, Fundar, Bloomberg

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Milei
REUTERS/Tomas Cuesta
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The News

Argentina devalued the peso by 50% on Tuesday to about 800 to $1, the first “shock therapy” measure ordered by newly inaugurated President Javier Milei as he works to relieve the country’s economic crisis.

Inflation is expected to increase and the economic situation will worsen in the coming months, Economic Minister Luis Caputo acknowledged in a televised address, but the plan is crucial so that agribusiness and industrial sectors truly have “the appropriate incentives to increase production,” he said. To offset some of the costs for the more than 40% of Argentines living in poverty, Caputo said the value of the government-provided food card would rise by 50 per cent and child benefits would double.

The International Monetary Fund welcomed the changes, saying that the measures would “help stabilize the economy.”

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The poorest could feel the most intense shock

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Sources:  
Fundar, Former Social Development Minister Daniel Arroyo

The social benefit programs Milei has vowed to increase during transition can only offer so much of a safety net, critics argue, with only 60% of the poorest 10% actually covered by the food card and child benefit schemes. “What do you do with the remaining 40% in the face of such a shock?” asked one analyst for the economic think tank Fundar. Most of the country’s impoverished people receive benefits from a separate social benefits work program that will not get boosted in response to devaluation, the country’s former social development minister told Página 12, a left-leaning Argentine newspaper.

Financial markets responded positively to Milei’s move

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Source:  
Bloomberg

Argentine bonds climbed to the highest in two years following the announcement, with other securities also rising as investors now believe the country has “a path to jump-starting growth, as painful as the process may be for ordinary Argentines,” Bloomberg reports — though some investors still believe the shock therapy didn’t “go far enough.” Observers are also worried about political stagnation over future reforms, given that Milei’s coalition does not hold the majority of seats in Congress.

The Central Bank of Argentina needs to restock international reserves

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Source:  
Cohen Aliados Financieros

Markets had predicted a devaluation to the peso, but not such a drastic and immediate cut, one financial strategist told La Nación newspaper, which will immediately reduce the public’s demand for foreign currency. Coupled with a reduction in export costs also triggered by devaluation, the country will begin saving dollars needed to pay its foreign debt. But the “key to success” is for the country’s central bank to immediately begin buying dollars, the strategist said.

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