Economic Controls in Argentina: Challenges for Foreign Investment Under Milei

This article discusses the stringent currency and capital controls in Argentina under President Javier Milei, highlighting how these restrictions hinder foreign investment. Despite some easing, there are concerns of tighter regulations as Milei prepares for midterm elections. Future negotiations with the IMF may influence the lifting of these controls, which remain crucial to Argentina’s economic stability.

A little over a year into President Javier Milei’s administration, stringent exchange controls persist as a significant barrier for foreign investors in Argentina. Despite some easing of restrictions during his tenure, the rules, which have been in place for six years, show little sign of rapid removal as the country approaches 2025. In fact, certain controls have tightened in recent weeks, raising concerns among investors.

The manner and timing of Argentina’s eventual lifting of these controls are crucial, especially as the nation engages in negotiations with the International Monetary Fund (IMF) for a new program succeeding the existing US$44 billion agreement, which expires in December. Current local market futures suggest investors anticipate continued depreciation of the peso, at a rate of approximately one percent monthly, despite real inflation rates exceeding this figure.

Investor sentiment remains cautious, as there is an inherent fear that these restrictions will endure until Argentina’s upcoming midterm elections, which Milei hopes will bolster his support. Analyst Pilar Tavella articulated this view, stating, “The market is not pricing in the lifting of currency and capital controls before the elections.”

The drop in foreign direct investment, with inflows only amounting to US$89 million in 2024, underscores this uncertainty, marking the lowest levels since 2003 as per the Central Bank data. Additional concerns are highlighted by the surge in private sector current account deficits to US$952 million, which triples the shortfall observed in September 2023.

In 2024, Argentina saw only six significant foreign investments under a program designed to provide incentives, with each project below US$10 billion. Projections for 2025 estimate foreign investment at US$1.4 billion, according to Grupo Mariva. However, it is considered unlikely that controls will be alleviated prior to the midterm elections, as noted by Juan Carlos Barboza of Grupo Mariva: “The government does not want to play with fire.”

Looking ahead, President Milei indicated plans to eliminate such controls by January 1, 2026, although a quicker removal could occur if the IMF provides necessary funding. The current restrictions include:
– Cross-restriction rule: prohibition of dollar purchases within 90 days surrounding specific foreign exchange transactions.
– Mandatory bank accounts: requirement to deposit dollars acquired via securities in bank accounts.
– Transaction limits: a cap of 200 million pesos (under US$190,000) in daily securities exchanges.
– One-day parking: stipulation to hold assets for a full day before conversion into dollars.
– Savings and expenses: imposition of taxes and limits on foreign currency purchases for savings and overseas credit card transactions.
– Dividends: restriction on multinational companies transferring profits abroad.
– Imports: reduction of dollar access times for importers, now an average of 30 days, compared to 180 days prior.

Recent regulations from the Central Bank further complicate the landscape by barring banks from selling corporate bonds abroad if purchased with local capital market dollars. Additionally, restrictions on agricultural exporters were tightened, while the peso’s depreciation rate was adjusted downward, affecting exporters due to a lag in the official market price compared to inflation, currently at about 2.2 percent monthly.

To counteract the weakening parallel exchange rate, the Central Bank has significantly increased the sale of foreign reserves. Despite these measures, there remains substantial apprehension around the potential for a rapid peso depreciation if the controls are lifted, which could adversely affect local prices and conclude the current disinflation trend. Annual inflation has decreased considerably, falling from 211 percent to 118 percent during Milei’s first year, reflecting his administration’s key accomplishments as the elections approach.

Currently, Argentina’s net international reserves are approximately US$28.7 billion, showing minimal change since Milei took office, while the net reserves indicate a negative position of US$4.5 billion, based on estimates from Grupo Cohen.

In conclusion, Argentina faces significant challenges as President Javier Milei navigates the complexities of lifting currency and capital controls amidst foreign investment concerns and an upcoming electoral backdrop. The persistence of strict regulations inhibits foreign influx, while ongoing discussions with the IMF can potentially reshape economic trajectories. The overall economic health, marked by inflation rates and net reserves, will be pivotal in determining the government’s course of action in the near future.

Original Source: www.batimes.com.ar