Javier Milei’s electoral win in Argentina was seen as a rough break from the traditional mold in Argentinian Politics: the Peronists and the Macris. The Peronists were Economic leftists, advancing for a welfare state and running large budget deficits. This was contrasted with the Macris, who advocated macroeconomic orthodoxy and tighter fiscal conditions for a country known to be riddled with debt. Milei was neither of those. He can be best classified as the radical right, a complete severance from political tradition best exemplified by his constant denunciation of the “political caste” system in Argentina. Famously brandishing a chainsaw in his campaigning and known to be foul-mouthed, Milei promised an end to the most pressing and tangible economic disease plaguing the country since the early 2000s: Inflation. This was primarily promised through two methods, one fiscal, one monetary. Fiscally, it was to implement historic fiscal cuts by cutting down ministries and reducing government disbursements and subsidies. Monetarily, it aimed to eliminate currency interventions used to finance fiscal deficits and allow the Argentine peso to float freely, reflecting a more authentic market value.

His performance has generally been regarded as surprisingly positive. Inflation rates MOM have dropped to 5-year lows, while the Argentinian Peso has exhibited surprising strength following widespread sentiment that expected it to massively depreciate in value. A strong balance sheet from fiscal cuts has also led to improved sovereign credibility as the country has been on-time in bond payments—a rarity in its checkered credit history. These results stand out in Argentina’s long history of economic turbulence. Yet, future guidance remains uncertain due to the difficult economic macro-environment of 2024-2025.

Here are the main concerns that are plaguing financial commentators and investors:

1) Cost-Push Inflation from Peso devaluation

Milei devalued the peso by nearly 50% from 400:1 (ARS/USD) to 800:1 (ARS/USD) upon assuming office. Further currency controls that were implemented in the previous Peronist regime will also be slashed upon accepting a generous $20 billion aid package by the IMF in April, 2025. These radical measures have led many to speculate on a reverse trend of cooling inflation that has followed since Milei.

The logic is as such: Huge devaluations in local currencies would result in more expensive imports, since foreign goods denominated in foreign currencies would now cost more in Argentina. This is what economists call cost-push or imported inflation, since local economies would now suffer higher prices from a change in the exchange rate.

However, worries about cost-push inflation from currency devaluation seems to be overblown. Argentina’s imports are mainly constituted of capital goods and intermediate goods that do not directly affect end consumers. These goods are typically positioned midstream or upstream in the supply chain and influence Consumer Price Indices only indirectly, through price pass-throughs from producers.

Fig 1. Import Share of Argentina with direct impact on CPI is relatively low. Source: Factset

Calculations reveal that the historical average share of imports with a direct impact on CPI is 17.52% of total imports. Compare this with a developed economy, such as the United States:

Fig 2. Import Share of USA tells a different story. Source: Factset

The rate is now much higher, standing at 36.43%. This means that price increases that result from imported inflation would be understated in countries like Argentina, whereby the excessive printing of money from Peronist regimes and the constant defaults that erode trust and result in capital flight seem to be the direct culprits.

2) Milei’s efforts on devaluing the currency might create dislocations within the economy, affecting companies that relied on currency mispricing and arbitrage

Due to the constant government intervention in the Peso in previous regimes and immense loss of confidence following multiple bankruptcies, there exists two exchange rates in Argentina. The official exchange rate is set by the government and reserved for privileged groups to prop up the peso, while the parallel (blue) rate emerged in the black market due to overwhelming demand from citizens seeking to hedge against inflation.

Milei believes that government interventions such as these currency controls create immense deadweight losses. Consumers see their wealth eroded as they must accept a more expensive rate of exchange that what would be in equilibrium (if the government free-floated the currency). In tandem to setting an official exchange rate that did not reflect market pricing of the peso (which was overvalued), previous governments sought to restrict capital flight by imposing strict guidelines surrounding repatriation and capital flow, scaring international investors. By artificially inflating the Peso, large inefficiencies were created, which was exactly what Milei wanted to correct.

Therefore, Milei’s decision to devalue the peso was both a logical response to the country’s new fiscal reality and a necessary correction of past distortions. Under previous regimes, the peso was artificially inflated due to persistent money printing to finance budget deficits. Now that Milei has implemented historic fiscal cuts and is running a budget surplus, there is no longer a need to support the currency through monetary expansion. More importantly, devaluing the peso aligns it with its true market value, eliminating the inefficiencies caused by distorted exchange rates and capital controls that we have talked about above.

In other words, Milei wants to get rid of the blue rate/official rate distinction, which could only exist under currency controls.

Fig 3. Blue/Official Exchange Rate Convergence in Argentina. Source: Bloomberg

NOTE: THIS GRAPH HAS CONVENIENTLY LABELLED THE OFFICIAL RATE AS THE BLUE RATE, WHICH MIGHT CAUSE CONFUSION.

Yet, this would be an enormous dislocation to many businesses which relied on such price arbitrage to boost earnings. A common practice for many Argentinian firms would be to import foreign goods and services at the official exchange rate value before selling them at the black-market rate domestically. Since the official exchange rate is artificially strong and the black-market rate reflects a weaker, more realistic valuation, firms were effectively able to buy low and sell high, capitalizing on the distortion. Companies could also issue cheaper debt with such exchange rate arbitrage, since they could raise cheaper USD with the official exchange rate—which overvalues the Peso—compared to if they had used the blue rate. All of this has come crashing down.

As Bloomberg reports, corporate defaults have increased following President Milei’s implementation of a crawling peg — a gradual move toward eliminating the distinction between the blue and official exchange rates. Many of the affected companies are in the agro-agricultural or natural resource sectors, which are highly exposed to global commodity markets.

For instance, Red Surcos, an agrochemical company, imports active ingredients such as phosphate, glyphosate, and atrazine from international suppliers, which it processes into crop-protection products. Positioned on the importing (buyer) side, it is particularly vulnerable to FX fluctuations, as these inputs are priced in USD. Conversely, Los Grobo, a major exporter of soybeans and wheat, is exposed to FX risk on the revenue (seller) side, earning income in USD while facing local peso-denominated obligations.

When Milei implemented the crawling peg, agricultural firms that relied heavily on USD-denominated imports saw their margins shrink, as they now needed more pesos to purchase the same inputs — raising their base costs. Meanwhile, export-driven firms also came under pressure: with the blue rate converging to the official rate, they lost the ability to convert USD earnings into an inflated amount of pesos, a key source of past profitability. Since this arbitrage was already priced into local markets, revenue in peso terms effectively declined. At the same time, import prices rose across the board, compounding cost pressures even for exporters. Therefore, Argentina's commodity-linked sectors that were deeply reliant on the previous FX gap seem to be particularly hit hard by Milei’s policies.

Yet, from a fundamental standpoint, these bankruptcies could be seen as a necessary correction. The previous FX arbitrage did not generate real value for the economy — it was a distortion that rewarded firms not for productivity, but for exploiting a dual exchange rate system. Their profits were largely windfalls from regulatory mispricing, rather than operational efficiency or innovation. Put in other words, their profits from price arbitrage are the deadweight losses that occur from the blue/official rate distinction. Milei’s policies flushed out ‘zombie companies’ — the corporate embodiments of allocative inefficiency bred by prolonged government distortion of the currency market. What seems to be an apparent crack in the Argentinian economy can in fact be seen by another perspective as creative destruction. The only problem now is ensuring that new companies can take the helm and assume the vacuum left by these local champions in this difficult economic environment. This is a much more difficult problem that must rely on Milei’s ability to ensure local competitive advantage and quality institutional reform amidst global uncertainty.

Argentina’s Great Repricing: Milei and the Peso