Argentina under Milei: from currency competition to where dollarization actually lands

The 2026 starting point: a real fiscal anchor, a smaller central bank #

When Javier Milei took office in December 2023 the consolidated public sector ran a primary deficit near 3 percent of GDP, BCRA non transferable letras dominated the asset side of the central bank, and the gap between the official peso and parallel quotes had blown past 180 percent. By the first quarter of 2026 the picture has been redrawn. The Treasury closed 2024 with a primary surplus of 1.8 percent of GDP, held 1.6 percent in 2025, and is tracking 1.4 percent for 2026 according to Ministerio de Economia quarterly fiscal reports. This is the longest run of consecutive primary surpluses since the early 2000s commodity window, and unlike that period it is being delivered without the tailwind of a soybean supercycle.

The composition matters as much as the headline. Roughly 60 percent of the adjustment came from the expenditure side, concentrated in energy and transport subsidies, discretionary transfers to provinces, and public works. Pension indexation reform and the partial unwinding of the PAIS tax on the revenue side did the rest. Importantly, BCRA has restructured the bulk of its peso liability stack: LELIQs were retired in 2024, replaced first by passive repos and then by Treasury LEFI bills, which moved interest cost from the central bank balance sheet onto the Treasury where it is now financed by the surplus. The implication for any dollarization arithmetic is direct, since the monetary base BCRA would need to extinguish is now meaningfully smaller in dollar terms than it was at the start of 2024.

Peso unification and the end of the cepo, in stages #

The April 2025 unification was the single most consequential FX decision of the Milei period. The official rate was allowed to converge to a managed band against the dollar, the 80/20 export liquidation rule was scrapped, and most goods related capital controls for corporates were lifted. Households retained access restrictions through the rest of 2025, with the final dollar purchase caps for retail savers removed in February 2026. The IMF disbursed $12 billion against this sequencing, with a further $8 billion staged across 2026 and 2027 conditional on reserve accumulation targets.

Net international reserves, which were deeply negative at the handover, crossed zero in mid 2024 and stood near $14 billion at end March 2026. That is still well below the roughly $35 to 40 billion floor most sell side analysts treat as the threshold for a credible hard peg or formal dollarization. The current account has swung to a small surplus on the back of Vaca Muerta oil exports and a recovering grain harvest, but the capital account remains thin, with foreign direct investment running at around 1.2 percent of GDP, concentrated in energy and mining.

What dollarization would actually require #

The slogan from the 2023 campaign was straightforward, replace the peso with the dollar and abolish the BCRA. The arithmetic of doing it in 2026 is less straightforward. To retire the monetary base at the prevailing CCL rate, Argentina needs hard currency to cover circulating pesos, bank reserves at BCRA, and the residual stock of remunerated peso liabilities that have not yet been migrated to the Treasury. At April 2026 prices that bill comes to roughly $40 billion, comprising about $11 billion for currency in circulation, $18 billion for bank reserves and remaining repos, and a buffer of $10 to 12 billion for transactional liquidity in the new dollar regime.

Argentina does not have $40 billion of unencumbered hard currency, and the IMF program is explicitly not structured to fund a unilateral conversion. Bilateral options are narrow: the People's Bank of China currency swap line is sized at the equivalent of $18 billion but is largely unactivated and politically awkward to convert into a dollarization war chest, and US Treasury exchange stabilization fund support of the kind that backed Mexico in 1995 has not been signaled. Sovereign external issuance at a 412 basis point EMBI spread is feasible for liability management but not at a scale that would close the gap in a single year. The realistic path is therefore incremental, with currency competition operating as the live regime while reserves are accumulated.

Currency competition: the middle path that is actually running #

Currency competition, the framework promoted by BCRA president Santiago Bausili and economy minister Luis Caputo through 2025, is the regime Argentina now operates. Dollar denominated bank deposits are permitted and growing, having crossed $35 billion in March 2026 versus $19 billion at end 2023. Mortgages indexed in UVA and a small but rising stock of dollar denominated mortgages are returning to the banking system. Tax payments can be settled in dollars in a widening list of categories, and the government has signaled that USD invoices for B2B transactions over a threshold will be tolerated rather than penalized.

What this regime does not do is extinguish the peso. The peso remains legal tender, BCRA continues to set a policy rate, and the Treasury continues to issue peso debt. The bet is that as confidence rises, Argentines will voluntarily denominate more of their balance sheet in dollars, the demand for peso real balances will shrink, and the transition to a fully dollarized economy can occur passively over a multi year horizon without the upfront reserve cost. The risk is symmetric, since the same flexibility that allows passive dollarization also allows passive re pesoization if confidence reverses, and the regime is therefore most fragile precisely when it appears most successful.

Parallel FX convergence and the credibility test #

The clearest market signal of the consolidation is the collapse in the gap between the official rate and the financial parallels. Contado con liquidacion (CCL), which allows residents to obtain dollars abroad through cross listed bond trades, and the Mercado Electronico de Pagos (MEP) which delivers dollars onshore, traded at premia of 184 percent and 169 percent respectively in late 2023. By March 2026 those premia had narrowed to 3.7 percent and 2.9 percent. Blue chip swap volumes have fallen as the arbitrage opportunity has compressed, and the informal blue dollar premium, the cash street rate, sits at roughly 4.5 percent.

Convergence at this level is consistent with a quasi unified FX market, but it is not yet self enforcing. Bloomberg implied volatility on one month ARS NDFs has compressed to around 11 percent from north of 60 percent two years ago, and that low volatility is itself a reason for caution, because it reflects an expectation that BCRA will defend the band rather than a market judgment that the peso is fundamentally stable. A reserve accumulation miss, a soybean export shortfall, or a midterm political shock could rapidly re widen these spreads, and the policy reaction function would then be tested in conditions very different from the orderly disinflation of 2024 and 2025.

The IMF program, the midterms, and the political envelope #

The Extended Fund Facility approved in April 2025 carries Argentina through the end of Milei's first term and is the binding external constraint on the macro program. Targets cover the primary surplus, net international reserve accumulation, zero monetary financing of the deficit, and a structural agenda on subsidies, tax reform, and labor market flexibility. The June 2026 review is the most important checkpoint of the year. Reserve accumulation is currently running about $2 billion behind the indicative path for the second quarter, and a waiver request is plausible rather than a programmatic break, but the optics around a waiver in the middle of the October midterm campaign are politically expensive.

The midterms themselves are the pivot. La Libertad Avanza will defend a small bloc and contest expansion in Buenos Aires province, Cordoba, and Mendoza, with the Macri aligned PRO providing a coalition floor and the Peronist opposition divided between Kirchnerist and federal Peronist wings. A result that gives the government a third or more of each chamber would open the structural reform agenda that the IMF program assumes for 2027. A result that does not would leave the fiscal anchor exposed to a Congress that can override vetoes on social spending, and would make the IMF program harder to roll into a successor arrangement after 2027.

Three scenarios for 2026 to 2028, and the Argus and Sisyphus anchor #

We frame three scenarios for the macro-financial outlook over the 2026 to 2028 horizon. The base case, weighted at 55 percent, is muddle through with currency competition deepening but no formal dollarization, GDP growing at 3.5 to 4 percent, inflation falling toward 12 percent by end 2027, and reserves climbing to the $25 to 30 billion range. The upside case, weighted at 25 percent, is soft dollarization in 2027 after a strong midterm result and a successful sovereign liability management operation, with the peso retained as a unit of account but transactional dollarization becoming dominant. The downside case, weighted at 20 percent, is program rupture, triggered by a reserve miss, a midterm setback, or an external shock, with the gap re widening past 30 percent and inflation re accelerating into the 40s.

For Argus and Sisyphus clients with Argentina exposure, the operational implication is that 2026 is a year to extend tenor selectively in hard currency sovereign and quasi sovereign credit, to underweight peso linked instruments beyond the one year point, and to treat corporate USD issuance from energy and mining as the cleanest expression of the constructive case. Hedging cost on ARS exposure remains expensive relative to realized volatility, but the asymmetry of the political calendar argues for carrying protection through October. The Milei program has earned the benefit of the doubt that it did not have at the start of 2024, but Argentina remains a country where credibility is rented rather than owned, and the 2026 midterm is the renewal date.

Sources #

• BCRA Argentina central bank statistics
• INDEC Argentina statistics
• IMF Article IV Argentina
• Ministerio de Economia fiscal data
• Bloomberg Argentine financial market data (cited)