Javier Milei’s presidency faces substantial hurdles regarding currency and capital controls, deterring foreign investment amid ongoing IMF negotiations. While some restrictions have been eased, recent intensifications hint at a prolonged status quo until at least the midterm elections. Investors are increasingly cautious, and overall direct investment has plummeted, reflecting the challenges within Argentina’s economic landscape.
Since Javier Milei assumed the presidency, stringent currency restrictions continue to impede foreign investment in Argentine assets. Although Milei has initiated actions to alleviate these restraints, indications for a swift removal of the regulations that have been effective for six years are minimal. Moreover, some measures have recently been intensified, posing significant challenges for investor confidence.
The timing of Argentina’s easing of these controls is crucial for the ongoing negotiations with the International Monetary Fund (IMF), particularly as it seeks a new program to replace the existing US$44 billion agreement expiring in December. Futures pricing in Argentina’s local Rofex market suggests that investors anticipate the peso’s depreciation to persist at approximately one percent monthly, a figure below the current inflation rates, raising concerns that restrictions may linger until Milei’s midterm elections in October.
Pilar Tavella, a strategist at Balanz Capital Valores, indicated that there is skepticism regarding the removal of currency and capital controls ahead of the elections. Furthermore, the government has previously suspended primary elections scheduled for August to consolidate support ahead of the midterm votes.
The decline in foreign direct investment has been significant, with inflows dropping to US$89 million in 2024, the lowest recorded since 2003, as reported by the Central Bank. Concurrently, the private sector’s current account deficit has expanded, recording a US$952 million shortfall for Milei’s tenure, which is threefold the September deficit.
As part of the RIGI program, which offers tax and exchange-rate incentives, only six major foreign investments were realized in 2024, with each project valued under US$10 billion. Expectations for 2025 predict approximately US$1.4 billion in foreign investment, according to Grupo Mariva, a financial institution in Buenos Aires.
The government is unlikely to abolish controls prior to the midterm elections, as Juan Carlos Barboza of Grupo Mariva noted that the administration aims to avoid potential inflation volatility. In early February, Milei indicated the intention to lift controls by January 1, 2026, contingent upon the IMF providing additional funding.
Investors currently face several restrictions:
– Cross-restriction rule: Preconditions restrict dollar purchase in the spot foreign exchange market surrounding legal foreign exchange transactions 90 days prior or subsequent.
– Mandatory bank accounts: Dollar transactions from securities must be deposited into bank accounts.
– Transaction limits: A restriction of 200 million pesos (less than US$190,000) per day for foreign investors requires prior notification to the Central Bank.
– One-day parking: Investors must maintain assets for one day before dollar exchange.
– Savings and expenses: Restrictions include a maximum cap of US$200 on foreign currency purchases for savings and credit card expenses abroad.
– Dividends: There are limitations on multinational companies transferring dividends overseas.
– Imports: Despite a reduction in wait times for dollar access from 180 to 30 days, immediate accessibility remains absent.
Recent Central Bank regulations have intensified controls, banning banks from selling foreign corporate bonds acquired via capital market dollars. Additionally, agricultural exporters now face a tighter timeframe to sell currency to avail of tax cuts. Moreover, the Central Bank suppressed peso depreciation rates, causing challenges for exporters compelled to transact at unfavorable rates against rising inflation, currently at 2.2 percent.
Fears persist regarding a quick withdrawal of currency controls, as it may trigger sizeable peso depreciation, driving local prices upwards and jeopardizing the ongoing disinflation efforts. Although annual inflation has reduced significantly from 211 percent to 118 percent, it remains a pivotal aspect of Milei’s administration and campaign. Furthermore, Argentina’s net international reserves correspondingly remain low, estimated at US$28.7 billion, while net reserves considering short-term liabilities stand at minus US$4.5 billion, according to Grupo Cohen estimates.
In conclusion, Argentina’s currency and capital controls remain a critical challenge for foreign investors, exacerbated by Milei’s recent tightening of regulations amid ongoing IMF negotiations. The outlook for foreign investment appears grim with minimal easing expected before the midterm elections. As the administration grapples with inflation and low net international reserves, the timetable for lifting these restrictions will substantially impact economic recovery and investor confidence.
Original Source: batimes.com.ar
