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By Jorge Otaola, Karin Strohecker, Rodrigo Campos
BUENOS AIRES (Reuters) -Argentina's peso slid 10% on Monday to near 1,200 per dollar after the country undid large parts of its currency and capital controls at the end of last week, part of sealing a $20 billion loan program with the International Monetary Fund.
Despite the volatility, the move to unravel controls in place since 2019 has been cheered by investors and economists, who say it marks a key step toward normalizing the Argentine economy after years of crises.
The move, which could risk stoking inflation and cause Argentines to rush to snap up dollars, is a key plank of libertarian President Javier Milei's bold and risky reforms in the grains-to-shale-rich country that has been battling triple-digit inflation, dwindling currency reserves and tepid growth.
More than half the IMF cash is expected this week, and alongside commitments from other multilateral lenders it is seen as fundamental for the building of reserves at the central bank.
Milei wants to bring international investors back to the country's mining and energy sectors, spurring development of shale oil and gas reserves in Vaca Muerta and deposits of lithium, which is used in electric vehicle batteries. The currency controls jammed up investment.
The peso drop came after the central bank undid its so-called crawling peg and allowed the currency to float freely within a far wider trading band of 1,000-1,400 pesos per dollar, a major policy shift investors and firms had been pushing for.
"In a baseline scenario, given the size and front-loaded nature of the IMF deal, the support of other multilaterals, the U.S. support ... all this points to a peso that should not persistently test the upper limit of the band," said Alejo Czerwonko, chief investment officer, emerging markets Americas, at UBS Global Wealth Management.
The currency had closed at 1,074 per dollar on Friday, though popular parallel rates often used by Argentines and local firms were nearer 1,350 per dollar.
The gap between the two rates narrowed sharply on Monday to around 5%, versus 28% at the end of last week, with the official exchange rate weakening and parallel rates gaining.
BONDS RALLY
The country's international bonds on Monday rallied with some maturities adding more than 4 cents on the dollar, according to data from MarketAxess. Some local bonds slipped, while the local Merval stock exchange closed up 4.7%.
The IMF support is seen boosting overall confidence and the removal of controls could help spur investment.
"We have a positive view of the announced macro framework, which should allow for FX reserve accumulation and more sustained growth," said Morgan Stanley economist Fernando Sedano in a note on Monday.
He added that inflation could heat up in the short term, and interest rates may have to rise.
A visit to Argentina on Monday by U.S. Treasury Secretary Scott Bessent was an explicit show of support, while Argentina has been pushing the United States for a deal to avoid getting caught in U.S. President Donald Trump's global trade war. Milei and Trump are ideological allies.
"Is what we're seeing today influenced by the Milei-Trump relationship? Yes, I think that's consensus," UBS's Czerwonko said.
'A SEMBLANCE OF MACROECONOMIC STABILITY'
The IMF deal will release an initial $12 billion, with $3 billion more coming later in the year. Argentina also announced loan deals for close to $6 billion with other multinational lenders and banks that should help bolster its depleted foreign currency reserves.
The South American grains producer is digging itself out of a major economic crisis under Milei, who came to office in late 2023 and has managed to stabilize the economy with austerity and fiscal discipline.
Capital Economics said Buenos Aires had moved "more quickly than we'd anticipated to restore macro orthodoxy," though cautioned that the peso still looked overvalued.
"The country appears closer to a semblance of macroeconomic stability than at any point since the 2000s," it wrote.
The IMF deal came with targets and baseline assumptions in which the country would continue to commit to a "zero deficit" and to build up reserves this year. New investment in areas like energy and grain exports will be important for that.
J.P. Morgan said the fall in the peso could be tempered by demand from grain exporters for pesos as they looked to liquidate their foreign currency income at a more attractive exchange rate.
"In our view, the official FX will likely stabilize below the parallel FX level as of Friday, with agriculture-related FX supply catching up. The FX gap will likely shrink to around 5%," the investment bank said.
(Reporting by Adam Jourdan, Karin Strohecker, Rodrigo Campos and Jorge Otaola; Writing by Adam Jourdan; Editing by Franklin Paul, Bill Berkrot, Cynthia Osterman and Matthew Lewis)
