Argentina may abandon peso for U.S. dollar as Milei elected president

Argentina could soon abandon the peso and adopt the U.S. dollar as its national currency following the victory of far-right economist Javier Milei in the presidential runoff on Sunday.

Milei, who represented the La Libertad Avanza coalition, secured nearly 56 percent of the vote, ousting incumbent Peronist party candidate Sergio Massa.

After his victory on Sunday, Milei announced plans to reduce government spending, open the economy and sell state-owned firms, such as oil firm YPF. However, he did not mention dollarization.

Milei has strongly advocated for dollarizing Argentina’s economy, citing the need to curb rampant inflation, which surged to 143 percent in October. He also pledged to curtail the central bank’s power to print money and accumulate Bitcoin as reserves. Unrestrained money printing, economists say, has been a significant driver of Argentina’s inflation woes.

Milei had described the Argentinian peso as a “repugnant paper,” saying it caused poverty in the country. He also accused politicians of prioritizing personal gains over national interests, particularly in manipulating the currency. Economist Steve Hanke, a supporter of Milei’s dollarization plan, said the candidate’s proposal was “clearly a vote-getter.”

Argentina’s financial markets are closed on Monday due to a local holiday, but the peso depreciated in limited trading, settling around 353.82 per U.S. dollar. The currency has devalued 875 percent against the dollar over the past five years due to hyperinflation, debt and political instability since 2008.

Argentine dollar bonds and New York-listed shares rose following Milei’s remarks. YPF shares soared 36 percent on expectations of privatization, while Grupo Financiero Galicia SA and Banco Macro climbed 20 percent.

Challenges to dollarization plan

Analysts believe that Milei’s dollarization plan will place multiple challenges, including the potential erosion of Argentina’s autonomy in monetary policy.

It would also be an unprecedented move for an economy of its size, since other countries that have dollarized are far smaller, like Ecuador, Salvadora and Panama.

Dollarization in Ecuador and El Salvador did not inherently lead to an improvement in public finances. El Salvador failed to see improved debt ratings — unlike Panama, which adopted the dollar in 1904 after its independence — due to the country’s piling debts. Ecuador, which defaulted on its debt in 2020, also does not have the same financial standing.

“It’s not a substitute for structural reform,” said Augusto de la Torre, Ecuador’s central bank governor in the 1990s. “But undoubtedly, it can provide nominal stability. It can give you a much more stable financial transactions environment and a much more stable inflation rate.”

Argentina has a relatively closed economy. Its commodity-based export platform has a distinct business cycle compared to the U.S., and unlike Panama, it is more susceptible to the effects of U.S. monetary policy.

Markus Jaeger, a global economy analyst at intelligence firm Stratfor, also pointed out in October that Argentina lacks enough U.S. dollar assets to finance the ambitious proposal. Its severe dollar shortage even forced it to utilize the Chinese yuan in a recent IMF loan repayment. The country has also been shut out of global debt markets recently.

Another challenge is its divided Congress, where no political faction has a majority. The left-leaning Peronism movement—in power until Milei’s December 10 inauguration—and the center-right Together for Change coalition led by former President Mauricio Macri collectively hold less than half of the Senate and lower house seats.

The last challenge will be in the courts. In September, Supreme Court magistrate Horacio Rosatti told the Spanish newspaper El País that substituting the peso with a foreign currency would violate the constitution and national sovereignty.