Argentina trip notes (REER): The peso overvaluation thesis is overrated

• The peso’s strength is backed by fundamentals, and its potential overvaluation is not a systemic risk, in our view

• Tight monetary and fiscal stances mean this time is different from Macri’s era, and a 2018-style crisis is unlikely

• We also discuss the recent peso weakness, remaining capital controls, current account, energy and tourism, and LC bonds
  
  

The views presented in this note are solely those of the author, based on conversations during a recent visit to Buenos Aires, and are not directly attributable to government authorities or other parties consulted on the trip. We are grateful to the Institute of International Finance for facilitating many of the meetings. This is the third and final report in a series covering political developments, macro dynamics, and real exchange rate issues.

The three key sources of risk on investors’ and analysts’ minds when they think of Argentina these days are the midterms (see our analysis here), the insufficient accumulation of reserves (here), and the potential overvaluation of the peso, usually in that order. There is however a small contingent that (to our surprise) places special emphasis on the third risk.

Buenos Aires did feel anecdotally expensive, though not uniformly so: we thought tradable goods were notably dear, close to international prices (think Madrid levels), while services were more variable (eating out felt relatively costly, while taking an Uber or getting a haircut was cheap).

The feeling on the ground (one we shared) is that the peso is more likely than not overvalued. Nonetheless, we believe that assessing the peso’s relative strength is inherently difficult given that 1) there’s been major structural changes in the country since December 2023, and 2) standard trade-weighted real exchange rate analysis offers limited insight in an economy as volatile and distorted by on and off capital and exchange controls as Argentina…