Devaluation may be a term that’s anathema to President Javier Milei – he’s sworn repeatedly he won’t break his promise and let the peso plunge – but a stealth devaluation, well, that’s something he’s willing to accept.
Desperate to boost the supply of dollars in the foreign-exchange market and ease pressure on the peso, Milei’s government announced Monday the temporary suspension of export taxes on many of the country’s key crops. Exempt from those taxes, soybean farmers will reap, in pesos, an extra 25 percent or so for each dollar they get in revenue. For corn and wheat farmers, it’s about 10 percent.
These are in essence targeted devaluations – aimed in this case at those who control the largest supply of dollars into the country, the farmers. The measures last until October 31, or until crop sales under the new programme reach US$7 billion.
The benefit of this narrow approach by Milei, who’s also negotiating an emergency aid package with US President Donald Trump's administration, is it allows him to avoid the outright devaluation that would spark a surge in inflation and inflict more hardship on Argentines. But the cost is equally significant, slashing more than a billion dollars in much-needed revenue from an administration that has built its reputation – and market credibility – on balancing the budget.
“The measure may sacrifice fiscal revenue, but that seems second-order today,” Jimena Zuniga, Argentina economist at Bloomberg Economics, said by email. “It is as if you’ve broken your arm but you’ve survived a big accident – you celebrate. Up to this morning, the government seemed to be heading straight to such accident and that has been avoided.”
The announcement by Milei and an offer of aid by US Treasury Secretary Scott Bessent on Monday should see off any broader devaluation until after midterm elections on October 26, enabling the President to campaign under the star of a stable exchange rate and slowing inflation. Without those twin pillars, he risked losing support in Congress, potentially stalling the libertarians overhaul of the economy.
The peso posted its biggest gain since early May on Monday, leaping 4.5 percent against the US dollar, part of a broader rebound in Argentine assets. And for the first time since Wednesday, Argentina’s Central Bank didn’t intervene in the foreign exchange market.
Argentina has regularly reduced the levies on crop imports at times of currency crisis, but the complete elimination overnight – if only temporarily – is something new.
The new measures should quickly boost hard currency inflows, said Erico Weitemeier, head trader at FyO, one of Argentina’s biggest grains brokerages, in Rosario. “There are going to be really strong sales and that the government will easily get the US$7 billion before October 31,” he said. “Soy prices are rising by some US$50 a metric ton, and if farmers believe in Milei they also may think the exchange rate will actually strengthen down the line.”
Net crop exports were estimated in a August 29 report by the Rosario Board of Trade to close out the year at US$29 billion, with about US$10 billion of those cargoes seen coming between September and December. The current levies on exports total 24.5 percent for soy meal, Argentina’s biggest export, and soy oil; 26 percent for soybeans; and 9.5 percent for corn and wheat.
“It’s great news; it may not be permanent but at least it generates profits for farmers for 40 days so we can pay off debts and lock in purchases,” said Julio Reumann, a grower in La Pampa Province. “I don’t think the exchange rate will weaken from here. I’m going to take advantage to sell and upgrade my tractors.”
Falling prices
Soybean meal futures in Chicago fell by as much as 1.9 percent and soy oil futures slumped by up to 2.5 percent — as Milei’s manoeuvre heaped even more supply pressure on US farmers who are already harvesting a soy crop with major demand risks: China, usually their main buyer, isn’t booking cargoes amid trade sparring with US President Donald Trump.
Later on Monday, Milei extended the measure to beef, of which Argentina is also a major exporter and which carries a five percent levy, and chicken.
But while the move will likely bring billions of dollars into the country, it also shows the desperation of authorities after the peso weakened to the very limit of its trading band last week. The central bank spent more than US$1 billion to prop up the currency in just a few days last week, draining its scant foreign reserves that are ultimately needed to repay dollar bonds.
Following Milei’s announcement and Bessent’s intervention on Monday, Argentine dollar bonds maturing in 2035 leaped by the most since they were issued in 2020, jumping nearly nine cents to above 56 cents on the dollar, according to indicative pricing data compiled by Bloomberg.
Bessent pledged to provide “all options for stabilisation” the Argentine economy in a remarkable intervention that demonstrates Trump’s increasingly political role in Latin America. US help could potentially come from the Treasury’s Exchange Stabilisation Fund.
Milei is scheduled to meet Trump on Tuesday in New York.
“While the strong expression of US support by Bessent today would have likely sufficed to calm the currency market, it is reasonable ex ante to adopt as many measures as possible to stop a run and make sure you achieve an expectations reset,” Zuniga said.
by Jonathan Gilbert, Bloomberg
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