Argentina’s Dollarization Drive: Milei’s Strategy to Formalize Hidden Capital
Argentine President Javier Milei has enacted a decree to absorb an estimated $270 billion in undeclared U.S. dollars into the formal economy. This move allows citizens to use hidden cash for major transactions—real estate, vehicles, and business assets—without reporting the source. The decree forms part of Milei's larger goal of “endogenous dollarization,” a phased transition that increases the U.S. dollar’s role in domestic economic life without full legal tender status.
By boosting liquidity, encouraging investment, and reducing pressure on the peso, the policy could stabilize the macroeconomic environment. However, critics—including the IMF—warn that it risks enabling illicit financial flows if transparency and controls are not maintained.
Market response has been cautiously optimistic: the S&P Merval rose 1.82% and bonds gained 0.4% after recent political wins. Inflation has begun to cool, registering 2.4% in February 2025. Yet, the long-term success of Milei’s reforms depends on legislative backing, investor sentiment, and the administration’s ability to navigate complex political and regulatory terrain.
Base Case: “Gradual Liquidity Normalization” – 60% Probability
The decree survives legislative review and $70–$90 billion in informal capital is formalized. This liquidity influx supports higher consumption, especially in durable goods and property, lifting GDP by 1.2–1.5 percentage points over 12–18 months. Inflation stabilizes around 2.5% monthly. The peso remains legal tender but is increasingly sidelined for high-value transactions. Confidence in Milei’s program holds, bolstered by modest foreign investment inflows and steady IMF engagement.
Upside Case: “Accelerated Financial Rebirth” – 25% Probability
If legislative and judicial approval is swift and financial institutions embrace the policy, over $120 billion may enter the system, catalyzing rapid private sector expansion. Real estate and SME financing explode, GDP growth surpasses 2.5% annually, and inflation falls below 2% monthly. Sovereign bond spreads tighten by 300–400 basis points, and the government gains leverage in restructuring IMF terms. Milei’s political capital increases, allowing deeper reforms, including potential closure or restructuring of the Central Bank.
Downside Case: “Regulatory Recoil and Capital Freeze” – 15% Probability
This outcome assumes the policy is blocked or diluted by Congress or courts, and reputational risks trigger capital flight. Fewer than $30 billion of the targeted dollars are used, and most re-exit the system due to fear of retroactive penalties or unstable rules. Inflation re-accelerates above 4.5% monthly, and reserves drop amid dollar hoarding. Credit card firms and fintechs withdraw services, fearing renewed surveillance or expropriation. IMF ties fray, Milei’s approval collapses, and economic contraction resumes.
