Fiscal and exchange anchor with restrictions and no external credit
The collapse in the inflation rate (from 25% monthly in December, following the exchange rate adjustment, to 2.2% in January and 2.7% in February according to our RPS) and the rebound in economic activity (in November returned to October 2023 levels after hitting rock bottom last April) largely explain Milei’s political support. Despite a series of unforced errors, the dangerous escalation of verbal violence amplified through social media, and the extreme top-down governance style—applied to officials with a “guillotine” approach—he still appears to be the preferred choice of nearly half of society, driven by the fear of going backwards in a context of severe opposition fragmentation.
For now, the deterioration in Milei’s image seems minor compared to the media escalation of the cryptogate, as attention remains focused on the risks of judicial proceedings in the U.S. and, most importantly, the potential implications for his inner circle, which has not been subject to the “guillotine” approach.
It’s worth remembering that polls are one of the four key factors the market closely monitors, alongside fiscal surplus figures, the Central Bank’s dollar purchases, and the declining nominality managed by the economic team through capital controls, a 1% monthly currency crawl since February, and interventions in the exchange rate gap—doing whatever is necessary beyond the blend mechanism to keep the CCL dollar around $1,220 and the gap at 13/14%.
Throughout 2024 and up to January 2025 payment, the BCRA purchased USD23 billion, while the Treasury acquired USD15.8 billion from the BCRA. However, only USD2.5 billion remain in its deposits; the rest was used to pay off maturities.
The key development is that the government has managed to operate for a year and two months without accessing financial markets. However, the flipside—combined with a Treasury that, since last September, has only rolled over 90% of peso-denominated debt maturities and used its BCRA deposits (from the unwinding of remunerated liabilities) to buy dollars—is a remonetization of the economy without a corresponding increase in the BCRA’s reserves, maintaining reliance on capital controls. In fact, the monetary base has tripled since Milei took office (+20% in real terms) and doubled since the unwinding of remunerated liabilities began last May (+50% in real terms). Meanwhile, gross reserves have only increased by USD5 billion, and net reserves (discounting upcoming Bopreal payments and government deposits) by USD2 billion. The monetary base increased from $10 to $30 trillion, net reserves went from -USD 11.5 to -USD8.8 billion, and relevant debt (market + agencies) decreased from USD279 to USD266 billion.
Monetization is not inherently bad; in fact, it is what enabled the aggressive expansion of credit in pesos, simultaneous to a fiscal policy that has ceased to be contractionary at the margin (while maintaining a commitment to equilibrium) and an income policy that has been recovering against inflation in the private sector (formal and informal) explains the rebound in economic activity. The debate centers on the anchor and the dichotomy between remonetization with capital controls and without reserve accumulation, the demands of the IMF, and the contrast with the position held by the President.
On one hand, the IMF demands a less rigid framework that gradually dismantles the system of capital controls. Eventually, this would lead to a flexible exchange rate within narrow bands, where the BCRA would buy dollars at the lower band and sell dollars at the upper band. In addition to unlocking credit for the public sector, this framework requires a higher exchange rate to restore the current account surplus, mainly through the elimination of the Blend mechanism and higher domestic interest rates.
On the other hand, despite the evident remonetization, the President continues to insist that the supply of pesos is fixed and that a flexible exchange rate will be possible once inflation converges with the crawl. He set a target date of January 1, 2026, or earlier if the IMF recapitalizes the BCRA with Treasury debt. In this theoretical framework, which does not align with what is currently happening, the BCRA never accumulates reserves, nor is the economy remonetized. He explicitly refers to endogenous dollarization, stating: “Without pesos, people will have to start transacting in dollars, and the financial system will have to intermediate them.”
As we have been sustaining, it is difficult to imagine an agreement with the IMF in the near future that includes fresh funds, beyond a possible short-term Stand-By Agreement that would provide temporary relief by ensuring the rollover of maturities with multilateral agencies without altering the current exchange rate framework. It is also hard to envision a shift to a managed float exchange rate system before the elections.
We maintain (and adapt to the dynamics of the past month) the two scenarios for 2025, “It Works or It Doesn’t Work”, while keeping the current capital controls framework in place. We assume that the IMF will grant a short-term agreement that alleviates financial pressures by rolling over maturities with the IMF and other agencies (USD6.7 billion). The peso financing program still has room for monetization within the current framework, with $5 trillion remaining in deposits at the BCRA and, according to reports, another $5 trillion in accounts at Banco Nación, which could be unwound and financed by reducing Lefis. Eventually, reserve requirements could also come into play, bringing the monetary base, currently at $30 trillion, closer to the $47.7 trillion broad monetary base. Based on the estimated primary fiscal surplus and the pesos accumulated in these accounts, the rollover rate could mathematically be reduced to 60% (compared to 76% in the last tender). With a country risk at 720 basis points and strong intervention in the exchange rate gap, the economy is currently navigating between the two scenarios. The interaction between politics, finance, and the real economy, along with the election outcome and the decisions made afterward, will ultimately shape the 2026 scenario.
