How overvalued is Argentina's Peso?

The Peso has fallen sharply in the past week, but it's still at least 20 percent overvalued

Argentina has had a succession of governments in recent years and - on the surface - there’s been lots of change. But the one thing that never changes is Argentina’s “fear of floating,” i.e. its reluctance to uncouple the Peso from the Dollar. This is Argentina’s Achilles heel, as it limits just how much the export sector can grow. That’s existential, because it’s only through booming exports that Argentina can ever hope to get out of the mess it’s been in for many decades now.

Of course, allowing a free float is scary because the Peso is once again overvalued. That means switching to a free float will bring additional depreciation, on top of the sizeable fall that’s already played out over the past week. Today’s post tries to give some idea how overvalued the Peso might be. Currency valuation is notoriously difficult, so it’s best to keep things super simple and steer away from black box models. This suggests an overvaluation of at least 20 percent, even after this past week’s depreciation.

The left chart shows the Argentinian Peso as it’s usually quoted in markets: the number of Peso per US Dollar ($/ARS). The black line is the official exchange rate and the blue line is the parallel rate, which opened up after Argentina turned its back on Macri in Aug. ‘19. The Peso has fallen sharply over the past week following Milei’s recent electoral defeat. It’s down around seven percent and the parallel rate is another two percent weaker than the official rate. The right chart shows Argentina’s Peso in real effective terms (red line) - meaning it takes into account the inflationary impulse that inevitably follows large depreciations - in addition to real effective exchange rates for Brazil (black line) and Turkey (blue line). The Peso still looks substantially overvalued relative to its own history (it’s far above where it was after the devaluation in Dec. ‘23) and relative to its biggest trading partner (Brazil). Based on all this, I’d put the overvaluation of the Peso - taking into account recent depreciation - around 20 percent at a minimum. That might sound scary, but just think what a real exchange rate as competitive as Brazil or Turkey would do for exports. Argentina would be in a far better position rebalancing its economy with an export sector that’s booming. Better to just float the Peso once and for all and end decades of disastrous Dollar pegging.