Argentina faces ongoing strict capital controls hindering foreign investment, with President Javier Milei indicating a potential end to these restrictions by January 2026. Investment inflows are at a historic low, exacerbating current account deficits. Upcoming negotiations with the IMF may shape future policies, but immediate control lifting appears unlikely ahead of midterm elections amidst inflation concerns.
Following Javier Milei’s inauguration, Argentina continues to grapple with stringent exchange controls that pose significant challenges for foreign investors. While Milei has undertaken measures to alleviate some restrictions in his first year, he has shown limited intent to further relax these rules as 2025 begins, even amidst tightened measures recently introduced.
The future removal of these controls will be crucial in negotiations with the International Monetary Fund (IMF) regarding a new program succeeding the expiring $44 billion agreement due in December. Investors predict that the peso will depreciate at approximately one percent monthly, which is manageable under the current government peg, yet this is perceived as inadequate against rising inflation.
Market analysts express skepticism about the immediate lifting of currency controls, especially as Milei has sought to bolster voter support ahead of midterm elections. Pilar Tavella, a strategist from Balanz Capital Valores in Buenos Aires, noted, “The market is not pricing in the lifting of currency and capital controls before the elections.”
The effects of these restrictions are evident as Argentina has seen a drastic decline in foreign direct investment, with 2024 inflows at a mere $89 million—marking the lowest figure since 2003. This decline accompanies soaring private-sector current account deficits, reaching a record $952 million in Milei’s term.
In 2024, only six major foreign investments occurred under a program known as RIGI, which incentivizes long-term projects, each below $10 billion. Projections for foreign investment in 2025 stand at around $1.4 billion, as estimated by Grupo Mariva, a Buenos Aires financial firm.
Experts doubt that the government will modify any existing controls prior to the elections, concerned about potential inflation volatility following such moves. Juan Carlos Barboza, head of research at Grupo Mariva, emphasized that the administration would be cautious in its approach to avoid exacerbating inflationary pressures.
Milei remarked earlier this year that all controls would cease by January 1, 2026, indicating possible acceleration in lifting restrictions should the IMF provide additional funding, creating a classic scenario of reciprocal obligations.
Currently, investors face numerous restrictions:
– Cross-restriction rule: Investors cannot purchase dollars on the spot market 90 days before or after parallel market transactions.
– Mandatory bank accounts: Dollars from securities transactions must be deposited into bank accounts.
– Transaction limits: Purchases and sales of securities by foreign investors are capped at 200 million pesos (approx. $190,000) daily, pending prior notification to the Central Bank.
– One-day parking: Investors are required to hold assets for one day before converting them to dollars.
– Savings and expenses: A maximum of $200 applies to currency purchases for savings and credit card transactions abroad, coupled with additional taxes.
– Dividends: Multinational companies face restrictions when transferring dividends abroad.
– Imports: Timeframes for accessing dollars on imports have been reduced to approximately 30 days, from 180 previously.
Recent regulatory changes from the Central Bank restricted banks from selling abroad corporate bonds bought with dollars from the capital market. Moreover, a new measure has shortened the period for agricultural exporters to sell foreign currency to qualify for export tax reductions.
Amidst these dynamics, the Central Bank has cut the peso depreciation rate from two to one percent per month, adding pressure on exporters who must sell dollars below the prevailing inflation rate of about 2.2 percent monthly. The government initiated substantial tax reductions on specific exports in January to aid this sector.
Since June, the Central Bank increased foreign reserve sales to alleviate the widening gap between official and parallel exchange rates, totaling $1.6 billion in six months. Both Milei and investors fear the repercussions of lifting controls could lead to a sharp peso decline, worsening inflation and complicating recent disinflation success, which recorded a drop in annual inflation from 211 percent to 118 percent.
As it stands, Argentina’s net international reserves hover at approximately $28.7 billion—unchanged from when Milei assumed office—with net reserves at minus $4.5 billion, based on Grupo Cohen’s assessments.
In summary, Argentina faces substantial challenges in addressing its strict currency and capital controls, significantly impacting foreign investment. Although President Javier Milei has suggested an intention to eliminate these controls by January 1, 2026, analysts remain skeptical regarding immediate change, particularly with midterm elections approaching. Current regulations continue to hinder investor confidence, as reflected in record low foreign investments and increasing current account deficits. The outcome of ongoing negotiations with the IMF may influence the government’s future actions regarding these controls, yet immediate relaxation seems unlikely given prevailing economic conditions.
Original Source: batimes.com.ar
