Milei’s tax cut on crops quickly lures US$7 billion into Argentina

Argentina’s currency market is being flooded with dollars from grain purchases, prompting calls for the government to start rebuilding its stock of hard-currency reserves after selling more than US$1 billion last week. 

Exporters rushed to take advantage of a temporary tax break on export duties announced Monday by President Javier Milei’s administration and a foreign-exchange rate that became even more favourable after forceful pledges of US support for his economic agenda. 

By Wednesday evening, the tax agency said the US$7 billion cap set by the government had been reached. To benefit from the tax relief, 90 percent of those dollars have to be sold in the FX market within 72 hours.

Boosting reserves has been a long-standing demand from analysts and the International Monetary Fund, but so far Milei has resisted. That will likely change now that the peso, a currency that’s been ravaged by repeated crises, has stabilised.

The sudden influx represents “an enormous figure for a currency market that usually trades about US$500 million a day,” said Regina Martinez Riekes, a director at Amauta Inversiones. “Authorities must not only accumulate reserves, they also need to prevent excessive peso appreciation.”

The peso, which hit a record low of 1,475 per dollar on Friday, has since rebounded nearly 10 percent. Devaluation bets dropped sharply after US President Donald Trump’s administration said it’s discussing a US$20-billion swap line with Argentina.

For many, the time for Milei to act is now. “It’s necessary for the Central Bank to use these temporary supply shocks to buy dollars and have enough reserves to deal with a potential reversal,” said Daniel Marx, a former finance secretary and director at Quantum Finanzas, a consultancy. 

Central Bank reserves have fallen by US$4 billion to US$39 billion since peaking on August 4, after the monetary authority sold more than US$1 billion in just three days last week to defend the trading band agreed with the IMF. Analysts say the need to rebuild buffers is why markets expect a floor for the exchange rate.

Any replenishment of reserves would mark a turn for Milei, who previously avoided issuing pesos that could undermine his disinflation goals. “There will be no intervention until the peso hits the band floor — that is, no purchases above 1,000 per dollar,” the President posted on X on April 16. At midyear, the government even chose to issue peso debt payable in dollars rather than intervene in the FX market.

Bankers and analysts say a change is imminent. “I estimate they will start buying at 1,300 or 1,350, and then we’ll be able to say the FX band has narrowed,” said Carolina Schuartzman, director at Banco de Valores. The band’s floor is currently at 947 pesos per dollar, while the ceiling stands at 1,478 per dollar.

“If they let too many dollars slip away and don’t rebuild reserves, the outlook won’t be good. Risk spreads won’t compress and they’ll be forced into asset-liability management,” Schuartzman said.

Some investors saw a first signal from the Central Bank on Wednesday, when it cut the one-day peso repo rate by 10 percentage points to 25 percent. The decision came as the peso was trading around 1,330 per dollar, leading many to interpret that level as the new, implicit floor of the band.

“The government must use the current moment to rebuild genuine reserves, making clear that US funds will be reserved for debt service, not FX defence,” said Juan Manuel Pazos, chief economist at broker One618, in a report to investors.