Argentina: Milei's transformation

Flirting with high income status…

Argentina is the second smallest of the G20 economies in terms of overall GDP (at both market exchange rate and PPP measures), just above South Africa. On a per capita PPP GDP basis basis it ranks higher, above the other two Latin American members of the G20 - Mexico and Brazil – and above China. On the World Bank’s measure, it is classified as a high middle income economy, not too far away from high income status.

…after a period of steady decline.

However, Argentina’s history is one of long, steady economic decline. Argentina was among the richest countries in the world in the late nineteenth and early twentieth centuries. The current issue is whether this trend decline can be reversed.

One encouraging aspect is that demographics are reasonably favourable. Over the next 25 years, the population is expected to grow and the proportion of working-age is set to remain relatively stable. This provides a foundation for growth. We see potential growth (that is, adding in expected productivity gains) of around 1.7% p.a.

Inflation control is key in the short term

Argentina has a history of high inflation and, indeed, hyperinflation. The latter is normally defined as a rate of over 50% per month. In July 1989, Argentina’s peak monthly rate was 197%. Compared to that, even the rate of 25.5% per month when Milei was inaugurated seems modest. The latest readings show progress, with a rate of 2.6% in April 2026. But the year-on-rate – the measure used in more stable economies – is running at around 30%. The IMF expects that to be the average rate for the full year. The central bank’s policy rate of 29% cannot realistically be cut much further if inflation remains stuck at that level.

Some may say this slow progress on inflation reflects the failure to implement the radical policies Milei initially promised. These included full dollarisation of the economy and the closure of the central bank. That proposal was, of course, somewhat unrealistic. It was replaced by a plan for “endogenous dollarisation”: that is, restricting the supply of Argentinian pesos (the peso would become a “museum piece”) and thereby encouraging a shift to the dollar.

Argentina has, of course, been close to dollarisation before. The peso was pegged to the dollar at a one-for-one rate for more than ten years (from April 1991 to January 2002) before being abandoned. Some say that this failure was because a one-for-one exchange rate peg does not amount to full dollarisation. Calls for full dollarisation - the abolition of the national currency -notably from the academic community, remain. But there is no certainty that full dollarisation would remain in place if it were introduced. Zimbabwe reintroduced its domestic currency after ten years of dollarisation, for example.

Crawling peg

Instead of dollarisation or a fixed peg to the dollar, Argentina used a classic ‘crawling peg’ for most of 2024 and early 2025, and then shifted in April 2025 to a wider ‘crawling band’ system. The basic idea in both systems is that the central bank manages the exchange rate gradually rather than allowing abrupt devaluations. The exchange rate was adjusted by a pre-announced monthly rate: initially 2% per month, reduced to 1% in early 2025.

The BCRA, Argentina’s central bank, enforced the system by buying and selling dollars in the  foreign-exchange market. Capital controls (‘el cepo’) also limited access to dollars and overseas transfers, making the system easier to sustain.

The problem was that inflation remained much higher than the rate of devaluation. As a result, Argentine prices and wages rose rapidly in dollar terms, making exports less competitive. The move to the wider exchange rate bands in April 2025, allows the peso to fluctuate more freely within official limits agreed under a new IMF-supported programme. But even so the peso is still overvalued on the basis of one popular measure, The Economist’s GDP-adjusted PPP.

Softening of activity

In that context, it is unsurprising that there has been a softening of real GDP growth, as shown by the monthly index of economic activity (see chart).

2025 real GDP growth was 4.4% but sustaining this will be difficult. A slightly lower growth rate is expected in the coming years and we put potential growth at 1.7% p.a.

Emissions

The country maintains low emissions per head, largely because it has a relatively large agricultural and small industrial sector. There seems to be only slow progress being made toward broader green transitions and sustainable infrastructure.

Fiscal Position

The government has achieved an amazing turnaround in government finances, with an almost balanced budget being recorded after years of chronic deficits. This fiscal consolidation was achieved through stringent expenditure cuts and a drastic reduction in state subsidies. While this newfound discipline has restored some market confidence, it has also sparked domestic debates regarding the social costs of austerity.

External Position

The nation currently exhibits a strong external position, with a small current account deficit. This resilience has been supported by improved agricultural export revenues and restricted import volumes. Maintaining this equilibrium is critical for rebuilding international investor trust and meeting foreign debt obligations.

Money and Credit

Broad money growth has eased from rates of well over 100% when Milei took office but at still over 30% it is not consistent with much lower inflation. Private sector credit, however, is well contained at just 24% of GDP.

Governance and Competitiveness

Institutional challenges continue to hinder long-term investment. The corruption perception score has deteriorated since 2019. Cutting bureaucratic red tape is an aim of the government , and progress has been made, but it needs to go further.